UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Transition Period from
to
Commission
File Number: 000-50838
NETLOGIC
MICROSYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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77-0455244
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(State
or Other Jurisdiction of Incorporation)
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(I.R.S.
Employer Identification No.)
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1875
Charleston Road, Mountain View, California
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94043
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(Address
of principal executive office)
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(Zip
Code)
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(650)
961-6676
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
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Common
Stock, $0.01 par value per share
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
| Title of each class | Name of each exchange on which registered | |
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Series
AA Junior Participating Preferred Stock, $0.01 par value per
share
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one.)
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer (Do not check if a smaller reporting company) ¨
Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨
No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2009, the last business day of the registrant’s
most recently completed second fiscal quarter, was approximately $679,787,184
(based on the last reported sale price of $36.46 on June 30,
2009).
28,746,887 shares
of the Registrant’s common stock, par value $0.01 per share, were outstanding as
of January 31, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
registrant’s proxy statement to be delivered to stockholders in connection with
the registrant’s 2010 Annual Meeting of Stockholders to be held on or about
May 7, 2010 are incorporated by reference into Part III of this Form 10-K.
The registrant intends to file its proxy statement within 120 days after its
fiscal year end.
FISCAL
2009 FORM 10-K
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Forward-looking
Statements
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, which include, without
limitation, statements about our future business operations and results, the
market for our technology, our strategy and competition. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed forward-looking statements. For example, the words “believes”,
“anticipates”, “plans”, “expects”, “intends” and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a discrepancy
include, but are not limited to, those discussed in “Business”, “Risks Factors”,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Quantitative and Qualitative Disclosures About Market Risk”
below. All forward-looking statements in this report are based on information
available to us as of the date of this report, and we assume no obligation to
update any such forward-looking statements. The information contained in this
report should be read in conjunction with our condensed financial statements and
the accompanying notes contained in this report. Unless expressly stated or the
context otherwise requires, the terms “we”, “our”, “us” and “NetLogic
Microsystems” refer to NetLogic Microsystems, Inc.
Overview
We are a
leading fabless semiconductor company that designs, develops and sells
proprietary high-performance processors and high-speed integrated circuits that
are used to enhance the performance and functionality of advanced 3G/4G mobile
wireless infrastructure, data center, enterprise, metro Ethernet, edge and core
infrastructure networks. Our market-leading product portfolio
includes high-performance multi-core processors, knowledge-based processors,
high-speed 10/40/100 Gigabit Ethernet (GE) physical layer (PHY) devices, network
search engines, and ultra low-power embedded processors. These
products are designed into high-performance systems such as switches, routers,
wireless base stations, radio network controllers, security appliances,
networked storage appliances, service gateways and connected media devices
offered by leading original equipment manufacturers (OEMs) such as AlaxalA
Networks Corporation, Alcatel-Lucent, ARRIS Group, Inc., Brocade Communications
Systems, Inc., Cisco Systems, Inc., Dell Inc., Ericsson, Fortinet, Inc.,
Fujitsu Limited, Hangzhou H3C Technologies Co. Ltd., Hitachi, Ltd., Huawei
Technologies Co., Ltd., Huawei Symantec Technologies Co.,Ltd , IBM Corporation,
Juniper Networks, Inc. , LG Electronics, Inc., Motorola, Inc., NEC Corporation,
Samsung Electronics, Sun Microsystems, Inc., Tellabs, and ZTE
Corporation.
The products
and technologies we have developed and acquired are targeted to enable our
customers to develop systems that support the increasing speeds and complexity
of the Internet infrastructure. We believe there is a growing need to include
multi-core processors, knowledge-based processors, and high speed physical layer
devices in a larger number of such systems as networks transition to all
Internet Protocol (IP) packet processing at increasing speeds and
complexity.
In 2009 we
continued to broaden our customer base and our product portfolio, as well as
strengthen our competitive positioning and research and development
capabilities, by entering into strategic acquisitions, including:
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The
acquisition of the network search engine business from Integrated Devices
Technology, Inc. (the “IDT NSE Acquisition”) in July 2009. The acquisition
was accounted for as a business combination during the third quarter of
fiscal 2009. As purchase consideration we paid $98.2 million in cash, net
of a price adjustment based on a determination of the actual amount of
inventory received.
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The
acquisition of RMI Corporation, or RMI, a provider of high-performance and
low-power multi-core, multi-threaded processors. Pursuant to the Agreement
and Plan of Merger Reorganization by and among us, Roadster Merger
Corporation, RMI Corporation and WP VIII Representative LLC dated as of
May 31, 2009, or the merger agreement, on October 30, 2009,
Roadster Merger Corporation was merged with and into RMI, and we delivered
merger consideration of approximately 5.0 million shares of our
common stock and $12.6 million cash to the paying agent for distribution
to the holders of RMI capital stock. Approximately 10% of the shares of
our common stock are being held in escrow as security for claims and
expenses that might arise during the first 12 months following the closing
date. We may be required to pay up to an additional 1.6 million
shares of common stock and $15.9 million cash to the former holders of RMI
capital stock as earn-out consideration based upon achieving specified
percentages of revenue targets for either the 12-month period from
October 1, 2009 through September 30, 2010, or the 12-month
period from November 1, 2009 through October 31, 2010, whichever
period results in the higher percentage of the revenue target. The
additional earn-out consideration, if any, net of applicable indemnity
claims, will be paid on or before December 31,
2010.
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Our
Markets
We sell our
products primarily to OEMs that supply networking equipment for the Internet
infrastructure, which consists of various networking systems that process
packets of information to enable communication between the networking systems.
This networking equipment includes routers, switches, application acceleration
equipment, network security appliances, network access equipment and networked
storage devices that are utilized by networking systems such
as:
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core
networks, for long-distance city-to-city communications which may span
hundreds or thousands of miles;
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enterprise
networks, for internal corporate communications, including access to
storage environments;
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datacenter
networks, for high-density server
farms;
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metro
networks, for intra-city communications which may span several
miles;
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edge
networks, which link core, metro, enterprise and access networks;
and
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access
networks, which connect individual users to the edge
network.
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Sales of IP based
networking equipment have increased overall during the past five years, as the
Internet has continued to grow and evolve to accommodate the continued growth in
the amount of digital media content available and provide converged support for
the quad-play applications of voice, data, video and mobility over a single
unified IP infrastructure. These applications include:
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mobile
Internet services (delivery of data, voice and video to mobile
devices);
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cloud
computing and data center
virtualization;
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Internet
Protocol television, or IPTV;
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video
on demand, or VoD;
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voice
transmission over the Internet, or
VoIP;
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on-line
gaming;
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filtering
of malware (e.g., virus, spyware and spam) and intrusion
attempts;
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email
communications;
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e-commerce;
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music,
picture and video file downloading and sharing to mobile devices such as
cell phones and portable music/video devices;
and
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Internet
browsing and video portal viewing delivered over the IP infrastructure to
cell phones and other mobile
devices.
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Due to the
increased usage of the Internet, as well as the greater complexity of the
Internet-based infrastructure to support quad-play applications, OEM systems
must increasingly make complex decisions about individual packets of information
using knowledge about the overall network, which includes the method and
manner in which networking systems are interconnected, as well as traffic
patterns and congestion points, connection availability, user-based privileges,
priorities and other attributes. These OEM systems also need knowledge
about the content carried by the network and the applications that use the
network. Using this knowledge of the network to make complex decisions about
individual packets of information involves network awareness, while using
knowledge of packet content to make complex decisions about individual packets
of information involves content awareness, also known as deep-packet inspection.
Network awareness and content awareness include the following:
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preferential
transmission of packets based upon assigned
priority;
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restrictions
on access based upon security
designations;
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changes
to packet forwarding destinations based upon traffic patterns and
bandwidth availability, or packet content;
and
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addition
or deletion of information about networks and users and
applications.
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Moreover,
network and content awareness in advanced systems require multiple classes of
packet processing, in addition to forwarding packets in the network. These
additional classes of processing include access control for network security,
prioritization of packets to maintain quality of service (QoS) and statistical
measurement of internet traffic for transaction billing. Compared to the basic
processing task of forwarding, these additional classes of
packet processing require a significantly higher degree of processing of IP
packets to enable network and content awareness, or network-aware and
content-aware processing.
Further, in
designing high performance systems, networking OEMs need to address other
performance issues, such as power dissipation. Minimizing the power dissipated
by integrated circuits is becoming more important for networking systems such as
routers and switches, which are increasingly designed in smaller form factors.
As a result, networking OEMs increasingly seek third party providers of advanced
processing solutions that complement their core competencies to enable network
and content awareness within their systems and meet their escalating performance
requirements for rapid processing speeds, complex decision-processing
capabilities, low power dissipation, small form factor and rapid
time-to-market.
Our
Strategy
Our
objectives are to be the leading provider of network-aware and content-aware
processing solutions, high-speed multi-core, multi-threaded processors, as well
as 10 to 100 Gigabit PHY layer solutions, to networking OEMs and to expand
into new markets and applications. To achieve these goals, we are pursuing the
following strategies:
Maintain and Extend
our Market and Technology Leadership Positions. We were the first
supplier: (i) to offer a knowledge-based processor with a high-speed serial
interface; (ii) to offer a “hybrid” architecture that integrates our advanced
Sahasra™ algorithmic technology with knowledge-based processing engines; (iii)
to offer a knowledge-based processor capable of delivering 1.6 billion decisions
per second of deterministic performance; (iv) to offer 225Gbps of interconnect
bandwidth, 256 thousand IPv6 database entries and 1 million Internet
Protocol Version 4 (IPv4) data entries; (v) the first supplier to achieve 1.0
Volt operation of knowledge-based processors for lower power dissipation; and
(vi) to achieve operating frequencies of up to 500 MHz. We were also the first
supplier of knowledge-based processors that are capable of processing
application networking and security functions with a single 10
Gigabit-per-second engine. In addition, we were the first supplier of quad-port
10 Gigabit and 100 Gigabit PHY solutions targeted at next-generation carrier
optical transport networks and advanced data-center networks. We intend to
expand our market and technology leadership positions by continuing to invest in
the development of successive generations of our knowledge-based processors,
multi-core processors, 10/40/100 Gigabit PHYs and our other products to meet the
increasingly high performance needs of networking OEMs, and as well as
potentially acquire such capabilities through strategic partnerships and
purchases of other businesses when we encounter favorable opportunities. We
intend to leverage our engineering capabilities and continue to invest
significant resources in recruiting and developing additional expertise in the
area of high performance circuit design, custom circuit layout, high performance
Input/Output interfaces, and applications engineering. By utilizing our
proprietary design methodologies, we intend to continue to target the most
demanding, advanced applications for our products.
Focus on Long-Term
Relationships with Industry-Leading OEM Customers. The design and
product life cycles of our OEM customers’ products have traditionally been
lengthy, and we work with our OEM customers at the pre-design and design stages.
As a result, our sales process typically requires us to maintain a long-term
commitment and close working relationship with our existing and potential OEM
customers. This process involves significant collaboration between our
engineering teams and the engineering teams of our OEM customers, and typically
involves the concurrent development of our processors and the
internally-designed packet processors of our OEM customers. We intend to
continue to focus on building long-term relationships with industry-leading
networking OEMs to facilitate the adoption of our products and to gain greater
insight into the needs of our OEM customers.
Leverage Technologies
to Create New Products and Pursue New Market Opportunities. We
intend to leverage our core design expertise to develop our products for a
broader range of applications to further expand our market opportunities. We
plan to address new market segments that are increasingly adopting network-aware
processing, such as corporate storage networks that use IP-based
packet-switching networking protocols. By utilizing our proprietary design
methodologies, we intend to continue to target the most demanding, advanced
applications for our products.
Capitalize on Highly
Focused Business Model. We are a fabless semiconductor company,
utilizing third parties to manufacture, assemble and test our products. This
approach reduces our capital and operating requirements and enables us to focus
greater resources on product development. We work closely with our
wafer foundries to incorporate advanced process technologies in our
solutions to achieve higher levels of performance and to reduce costs. These
technologies include advanced 130, 110, 80, 55 and 40 nanometer complimentary
metal oxide semiconductor (CMOS) processing nodes with up to eight layers of
copper interconnect and 300 millimeter wafer sizes. Our business model allows us
to benefit from the large manufacturing investment of our wafer foundries which
are able to leverage their investment across many markets.
Expand International
Presence. We sell our products on a worldwide basis and utilize a
network of direct sales, independent sales representatives and distributors in
the U.S., Europe and Asia. We intend to continue to expand our sales and
technical support organization to broaden our customer reach in new markets. We
believe that Asia, in particular China and Europe, where we have already
established customer relationships, provides the potential for significant
additional long-term growth for our products. Given the continued globalization
of OEM supply chains, particularly with respect to design and manufacturing, we
believe that having a global presence will become increasingly important for
securing new customers and design wins and to support OEMs in bringing their
products to markets.
Our Products
Our products
include high-performance knowledge-based processors, multi-core processors,
NETLite™ processors,
network search engines, 10/40/100 GE PHY products, and ultra low-power Alchemy®
processors.
Knowledge-based Processors
Knowledge-based
processors are integrated circuits that employ an advanced processor
architecture and a large knowledge or signature database containing information
on the network, as well as applications and content that run on the
network, to make complex decisions about individual packets of information
traveling through the network. Our knowledge-based processors significantly
enhance the ability of networking OEMs to supply network service providers with
systems offering more advanced functionality for the Internet, such as support
for IPTV, VoIP, unified threat management (UTM), virtual private networks
(VPNs), rich content delivery over mobile wireless networks, and streaming video
and audio.
Our
knowledge-based processors incorporate advanced technologies that enable rapid
processing, such as a superscalar architecture, which uses parallel-processing
techniques, and deep pipelining, which segments processing tasks into smaller
sub-tasks, for higher decision throughput. These technologies enable wireline
and wireless networking systems to perform a broad range of network-aware and
content-aware processing functions, such as application-based routing, UTM
network security, intrusion detection and prevention, virus inspection, access
control for network security, prioritization of traffic flow to maintain quality
of service and statistical measurement of Internet traffic for transaction
billing.
Layer 3-4
Knowledge-based Processors. Layers 3 and 4 refer to the data and
transport layers, respectively, of the OSI reference model. For networking
infrastructure that supports Layer 3-4 routing, decisions on how to handle IP
packets are made using the data that is contained in the packet header. The
packet header information consists of key data regarding the packet, including
the IP address of the system that generated the packet, referred to as the
source IP address, and the IP address of the device to which the packet is
to be transmitted, referred to as the destination IP address. Our proprietary
NL5000, NL6000, NL7000, NL8000 and NL9000 and NL11000 families of
knowledge-based processors operate in conjunction with an OEM-developed custom
integrated circuits, programmable logic devices, and one or more network
processing units (NPUs), and feature a proprietary interface that provides
advanced interface technology to enable networking OEMs to meet their system
performance requirements for Layer 3-4 processing. We also provide versions of
our proprietary interface knowledge-based processors that work with proprietary
custom integrated circuits and application software developed by or in
collaboration with Cisco Systems. We offer knowledge-based processors
with a range of knowledge database sizes, and all of our knowledge-based
processors are designed to be connected in groups to increase the knowledge
database available for processing.
We offer
knowledge-based processors with a range of knowledge database sizes, and all of
our knowledge-based processors are designed to be connected in groups to
increase the knowledge database available for processing.
In 2009, we
collaborated with one of our long-time foundry partners Taiwan Semiconductor
Manufacturing Company (TSMC) to complete the migration of our knowledge-based
processor family to the 55 nanometer (nm) process node. Additionally, we
recently announced our NL111024 knowledge-based processor fabricated on TSMC’s
40 nm process node. The NL111024 processor includes an enhanced knowledge-based
processing core capable of achieving 1.6 billion decisions per second (BDPS) and
integrates our serializer-deserializer (SerDes) technology from our physical
layer products to provide a serial interface that delivers 225 Gigabits per
second (Gbps) of chip-to-chip interconnect bandwidth. This high
performance input/output (I/O) bandwidth is particularly useful in processing
Internet Protocol Version 6 (IPv6) traffic.
We also offer
our Sahasra family of knowledge-based processors which use advanced algorithms
to achieve low power dissipation and are particularly well suited for
applications using exact match or longest-prefix match functions. This family of
devices scales up to 1.5 million IPv4 entries in a single
device.
NETL7™ Layer 7
Knowledge-based Processors. For networking infrastructure that supports
Layer 7 routing, decisions on how to handle IP packets are made using the
information that is contained in the packet payload or packet content. The
packet content contains the actual data being transmitted between applications
using the network. Layer 7 of the OSI reference model, known as the application
layer, facilitates communication between software applications and lower-layer
network services. Our NETL7TM knowledge-based
processors are designed to accelerate Layer 7 content processing and signature
recognition tasks for enterprise and carrier-class networks.
In April 2009
we announced the NLS2008 processor, which is the newest member of our NETL7 knowledge-based
processor family. The NLS2008 is the first processor capable of
deterministically performing Layer 7 content aware processing functions at 120
Gbps.
NETLite™
Processors
Our NETLite™
processor family is specifically designed for cost-sensitive, high-volume
applications such as entry-level switches, routers and access equipment. The
NETLite processor family leverages circuit techniques developed and refined
during the design of our knowledge-based processor families, and benefits from
die size optimization, lower power dissipation and redundant computing
techniques. In addition, the NETLite processors utilize a simplified pipeline
architecture, as compared to our knowledge based processors, that allows for
lower cost manufacturing and assembly in less expensive packages, and allows for
lower cost system designs. As such, the NETLite processors are ideal for
entry-level systems that do not require the advanced parallel processing and
deep pipelining performance of our high-end knowledge-based
processors.
Our NETLite
processors also include the Ayama™10000 and Ayama 20000 processors. We offer
these processors in densities ranging from 128K to 512K IPv4 entries, and they
include differentiated features such as Mini-Key™ power management. The Ayama
20000 processors incorporate all the features of the Ayama 10000 processors and
work seamlessly with industry-leading network processors and Ethernet switchers.
To help reduce development time and cost, we also offer the Ayama processors
with our Cynapse™ software
platform for customers to more easily integrate these processors into their
systems.
Network
Search Engines
We continue
to provide network search engine products including those we acquired from IDT
in July 2009, the TCAM2 products we purchase from Cypress Semiconductor
Corporation in August 2009, and our legacy network search engines, which include
the NSE1000 through NSE4000, the NSE70000 network search engine families and the
NSE3128GLM network search engines, a device that interfaces directly to certain
NPUs from Applied Micro Circuits Corporation. We introduced our network search
engine products between 1998 and 2001. These products are fabricated by UMC or
TSMC using a range of process technologies from 0.35 micron to 0.15
micron.
High Performance Multi-Core
Processors – RMI Acquisition
We offer a
range of high performance, highly integrated, feature-rich XLR®,
XLS® and
XLPTM
multi-core processor solutions that provide high throughput, power efficiency,
application and content awareness and security for the evolving global network.
These processors serve infrastructure equipment, enterprise systems and
connected media markets within the global network with a wide range of features
and performance configurations. Our multi-core solutions can replace a number of
single function semiconductors through a highly integrated processing solution
which provides customers with greater ease of design and faster time-to-market
for their products.
Our
multi-core processors offer up to four-way multi-threading cores that allow each
thread to act as a virtual central processing unit, or vCPUTM,
thereby making each processor core capable of much higher throughput than a
non-threaded core. The proprietary processor architecture also implements a
high-speed Memory Distributed Interconnect®
network, consisting of a Fast Messaging Network® and
point-to-point interconnects, enabling high-speed communication between cores,
accelerators and network interfaces and more efficient memory access. The
processors also include Autonomous Acceleration Engines ® that
enable them to offload computationally intensive software code from the
processing cores to an on-chip hardware component for faster and more
power-efficient execution. As a result, our processors can perform multiple
complex and specialized tasks such as network traffic prioritization and
application and content inspection without utilizing processor core resources.
In addition, all of our processors incorporate security processing engines or
algorithms for secure connectivity and communications.
In the
communications equipment market, our processor architecture integrates network
accelerators, memory access accelerators, compression and decompression engines,
and high performance network interconnects. This allows our customers to develop
systems with fewer semiconductor components as well as systems that perform a
broader range of functions. This level of integration eliminates the need for
separate co-processors, digital signal processors and the associated complexity
of software for each additional processing component.
XLR® Processor Family. Our
multi-core, multi-threaded XLR processor family is a high throughput,
feature-rich processor solution for a wide variety of high-performance
infrastructure equipment, enterprise networking, security and storage systems.
The XLR processors enable applications, such as integrated security, convergence
of voice, data and video applications (i.e., “triple play applications”),
virtualized storage, load balancing and server offload, as well as content and
application aware, multi-service routing and switching. All XLR processors are
software- and pin- compatible and available in a variety of power options,
enabling scalable system designs within a single platform.
XLS® Processor Family. Our XLS
processor family offers mid- to entry- level derivative versions of our XLR’s
multi-core, multi-threaded architecture. The XLS processors leverage the XLR’s
performance, scalability and technology and incorporate additional advanced
innovations. XLS processors address applications that demand smaller form
factors and lower power consumption. Our XLS processors are pin compatible
within each series and software compatible across all XLS and XLR processor
families.
XLPTM Processor Family. Our latest
generation XLP processor family is based on the XLR processor multi-core,
multi-threaded architecture, and features a multi-issue design and up to three
times higher throughput per Watt than the XLR processors with memory cache
systems, and internal and peripheral interconnects expanded to match the higher
throughput. The XLP processors are expected to enable applications, such as
integrated security, quad-play applications, virtualized storage, load balancing
and server offload, as well as content and application aware, multi-service
routing and switching. The XLP processors are designed on an advanced 40 nm
process and are expected to be available for sampling to customers in
2010.
Ultra
Low-Power Processor Family – RMI Acquisition
Alchemy® Ultra-Low Power Embedded
Processors. Our industry-leading Alchemy® processor family
comprises our industry leading embedded processors that deliver the powerful
processing performance, ultra low-power functionality and market specific
integration required for next-generation products like enterprise thin clients,
automotive infotainment, telematics, and other media-rich embedded applications.
Our ultra low-power embedded Alchemy processor cores are based on the standard
MIPS® processor instruction set. We utilize very low power
microprocessor design techniques and utilize low voltage and low leakage cell
libraries, which allow us to incorporate high power efficient cores in our
chips.
Physical
Layer Products
Our PHY
family of products provides high-performance, single, dual and quad-channel
low-power interface technology for high-density data communication and storage
systems, and offers comprehensive support for multiple 10/40/100 GE standards.
The PHY products also integrate advanced electronic dispersion compensation
technology. We expect our PHY family of products to benefit from the same market
drivers as our knowledge-based processors and multi-core processors, including
growth in 10 GE ports in switches and routers, data center servers, upgrades of
the telecom infrastructure to support IPTV, and the deployment of the 10/40/100
GE IP-backbone for advanced mobile wireless networks.
In July 2009,
we announced our NLP2040 and NLP3040 PHY products, which are the first
single-die, quad-port 10 GE PHY devices on the market, and which are
manufactured using TSMC’s 40 nm process node. Additionally, we announced our
NLP10000 PHY solution which is the first 100 GE PHY solution on the market.
These technology advances in our PHY solutions have enabled us to offer our
customers scalability for data-center, metro and long haul applications that
require the highest performance while maximizing energy efficiency. Also, in
November 2009, we announced production availability of our NLP1220 dual-port 8.5
Gbps FibreChannel PHY repeater device with an integrated low-power equalization
engine targeted at data center switches and enterprise storage
markets.
Customers
The markets
for networking, communication infrastructure, security and storage systems
utilizing our products and services are mainly served by large OEMs, such as
AlaxalA Networks Corporation, Alcatel-Lucent, ARRIS Group, Inc., Brocade
Communications Systems, Inc., Cisco Systems, Inc., Dell Inc.,
Ericsson, Fortinet, Inc., Fujitsu Limited, Hangzhou H3C Technologies Co.
Ltd,Hitachi, Ltd., Huawei Technologies Co., Ltd., Huawei Symantec Technologies
Co.,Ltd , IBM Corporation, Juniper Networks, Inc., LG Electronics, Inc.,
Motorola, Inc., NEC Corporation, Samsung Electronics, Sun Microsystems, Inc.,
Tellabs, and ZTE Corporation.
We work with
these and other OEMs to understand their requirements, and provide them with
solutions that they then qualify and, in some cases, specify for use within
their systems. While we sell directly to some OEMs, we also provide our products
and services indirectly to other OEMs through their contract manufacturers, who
in turn assemble our products into systems for delivery to our OEM customers.
Sales to contract manufacturers accounted for 43%, 41%, and 65% of total revenue
in 2009, 2008, and 2007, respectively. Sales of our products are generally made
under short-term, cancelable purchase orders. As a result, our ability to
predict future sales in any given period is limited and subject to change based
on demand for our OEM customers’ systems and their supply chain
decisions.
We also
provide our products and services indirectly to our OEM customers through our
international stocking sales representatives. Our stocking sales representatives
are independent entities that assist us in identifying and servicing foreign
networking OEMs and generally purchase our products directly from us for resale
to OEMs or contract manufacturers located outside the U.S. These international
stocking sales representatives generally exclusively service a particular
foreign region or customer base, and purchase our products pursuant to
cancelable and re-schedulable purchase orders containing our standard warranty
provisions for defects in materials, workmanship and product performance. At our
option, defective products may be returned for their purchase price or for
replacement. To date, our international stocking sales representatives have
returned a small number of defective products to us. Our international stocking
sales representatives may also act as a sales representative and receive
commissions on sales of our products. Our international stocking sales
representatives include Bussan Microelectronics Corporation/Mitsui Comtek
Corporation and Lestina International Limited. Sales through our international
stocking sales representatives accounted for 6%, 10%, and 11% of total revenue
in 2009, 2008, and 2007, respectively. While we have purchase agreements with
our international stocking sales representatives, they do not have long-term
contracts with any of our OEM customers that use our products and
services.
We also use
distributors to provide valuable assistance to end-users in delivery of our
products and related services. While we have purchase agreements with our
distributors, they do not commit the distributors to purchase specific
quantities of our products. We believe that distributors do not have long-term
contracts with any of their OEM or contract manufacture customers. In accordance
with standard market practice, our distributor agreements limit the
distributor’s ability to return product up to a portion of purchases in the
preceding quarter and limit price protection for inventory on-hand if it
subsequently lowers prices on our products. We recognize sales
through distributors at the time of shipment to end customers.
On
November 7, 2005, we entered into master purchase agreements with each of
Cisco Systems, Inc. and Cisco Systems International B.V. Cisco, who together
with their contract manufacturers, are our largest customers. Pursuant to these
agreements, we agreed to supply to Cisco (including its subsidiaries and
contract manufacturers) certain of our products for incorporation into Cisco’s
products. These agreements set forth the general business terms and conditions
applicable to our sales to Cisco, including,
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our
obligation to accept all purchase orders from Cisco, unless we are unable
to meet Cisco’s schedule;
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our
obligation to ensure that we have the capacity to increase or decrease
production of our knowledge-based processors based upon Cisco’s demand
forecasts;
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our
obligation to use our best efforts to meet Cisco’s stated cost reduction
targets and to provide to Cisco all price decreases that we
achieve;
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“most
favored nation” pricing and related audit rights in favor of Cisco,
providing that, in any quarter, the prices paid by Cisco for our products
(including progeny and replacements), will be the lowest prices paid for
those products by any of our other customers who purchase as much or less
than Cisco;
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our
obligation to provide Cisco, in the event of any short supply of products
or components, an allocation that is no less favorable than that provided
to our other customers purchasing similar quantities of similar
products;
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Cisco’s
cancellation rights for standard and custom
products;
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Cisco’s
approval and related rights with respect to any proposed changes to, or
discontinuation of, our products purchased by
Cisco;
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Cisco’s
right to purchase our knowledge-based processors directly from our
manufacturers under the following
circumstances;
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product
discontinuation;
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bankruptcy,
insolvency and similar situations;
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transfer
of at least 50% of our voting control to a Cisco competitor that generates
less than 50% of its annual sales from integrated circuit
products;
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in
all cases, subject, among other things, to Cisco’s continuing obligation
to pay us for the product and our obligation to disclose the costs charged
to us by our manufacturers;
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perpetual,
royalty-free, non-exclusive, worldwide license grant to Cisco to use
binary code versions of our software in connection with Cisco’s
manufacture, sale, license, loan or distribution of its products;
and
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Cisco’s
extended product warranties, generally for three years and, in the case of
epidemic failures, for five years and our indemnification obligation for
epidemic failures which will not exceed the greater of (on a per claim
basis) 25% of all amounts paid to us by Cisco during the preceding 12
months (approximately $15.4 million at December 31, 2009) or $9.0 million,
plus replacement costs. The initial term of these agreements was three
years and they were automatically renewed through November
2010.
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In 2007, at
Cisco’s request we transitioned into a just-in-time inventory model covering
substantially all of our product shipments to Cisco and its contract
manufacturers. In conjunction with this transition, we entered into a purchase
agreement with Wintec Industries who became the primary purchaser of our
products on a consignment basis for resale to Cisco and Cisco’s contract
manufacturers. We generally have provided to Wintec the same terms and
conditions that we provide to Cisco under the master purchase agreement between
us and Cisco, including: our obligations to accept all purchase orders from
Wintec (unless we are unable to meet Wintec’s schedule), ensure that we
have the capacity to increase or decrease production of our products based upon
Wintec’s demand forecasts, use our best efforts to meet Wintec’s stated cost
reduction targets and provide to Wintec all price decreases that we achieve,
cancellation rights for standard and custom products, and extended product
warranties. We also have extended to Wintec a credit limit sufficient to cover
our anticipated annual business with Cisco and Cisco’s contract manufacturers.
Sales through Wintec accounted for 33% and 35% of total revenue in 2009 and
2008, respectively.
In 2009, 2008
and 2007, Cisco, including its contract manufacturers, accounted for 35%, 38%,
and 50% of our total revenue, respectively. Cisco accounted for a smaller
portion of our total sales in 2009 as we increased our customer diversification.
Alcatel-Lucent was a 13% customer and Huawei Technologies Co., Ltd. became a 10%
customer, by revenue, in 2009. We intend to continue to further diversify our
customer account base in 2010.
Sales,
Marketing and Distribution
Our sales and
marketing strategy is to achieve design wins with leaders and emerging
participants in the networking, communications infrastructure, storage and
security systems market and to maintain these design wins primarily through
leading-edge products and superior customer service. We focus our marketing and
sales efforts at a high organizational level of our potential customers to
access key decision makers. In addition, as many targeted OEMs design custom
integrated circuits to interface to our products, we believe that
applications support at the early stages of design is critical to reducing
time-to-market and minimizing costly redesigns for our customers.
Our product
sales cycles can take over 24 months to complete, requiring a significant
investment in time, resources and engineering before realization of income from
product sales, if at all. Such long sales cycles mean that OEM customers’ vendor
selections, once made, are normally difficult to change. As a result, a design
loss to the competition can negatively impact our financial results for several
years. Similarly, design wins can result in an extended period of revenue
opportunities with that customer.
We market and
sell our products through our direct sales force, distributors, and through
independent sales representatives throughout the world. Our direct sales force
is dedicated to enhancing relationships with our customers. We supplement our
direct sales force with independent sales representatives, who have been
selected based on their understanding of our targeted customers’ systems market
and their level of penetration at our target OEM customers. We also use
application engineers to provide technical support and design assistance to
existing and potential customers.
Our marketing
group is responsible for market and competitive analyses and defining our
product roadmaps and specifications to take advantage of market opportunities.
This group works closely with our research and development group to align
development programs and product launches with our OEM customers’ schedules.
Additionally, this group develops and maintains marketing materials, training
programs and our web site to convey our benefits to our targeted
OEMs.
We operate in
one business segment and primarily sell our products directly to customers in
the United States, Asia and Europe. Sales for the geographic regions reported
below are based upon the bill-to customer headquarter locations. Following is a
summary of the geographic information related to revenues for the years ended
December 31, 2009, 2008, and 2007 (in thousands):
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Year
Ended December 31,
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2009
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2008
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2007
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Revenue:
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United
States
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$ | 43,920 | $ | 46,287 | $ | 48,221 | ||||||
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Malaysia
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54,379 | 42,435 | 34,017 | |||||||||
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China
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47,620 | 30,378 | 14,126 | |||||||||
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Other
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28,770 | 20,827 | 12,699 | |||||||||
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Total
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$ | 174,689 | $ | 139,927 | $ | 109,063 | ||||||
Research
and Development
We devote
substantial resources to the development of new products, improvement of
existing products and support of the emerging requirements of our targeted
customers. We have assembled a team of product designers possessing extensive
experience in system architecture, analog and digital circuit design, hardware
reference board design, software architecture and driver design and advanced
fabrication process technologies. Our engineering design teams are located in
Mountain View and Cupertino, California, Austin, Texas, Beijing, China and
Bangalore and Mumbai, India. As of December 31, 2009, we had
approximately 324 full-time employees engaged in research and development
worldwide. Our research and development expenses were $73.6 million,
$51.6 million, and $45.2 million for the years ended December 31,
2009, 2008, and 2007, respectively.
We use a
number of standard design tools in the design, manufacture and verification of
our products. Due to the highly complex design requirements of our products, we
typically supplement these standard tools with our own tools to create a
proprietary design method that allows us to optimize the performance of our
products at the circuit-level.
Manufacturing
and Materials
We design and
develop all of our products and electronically transfer our proprietary designs
to third party wafer foundries to manufacture our products. Wafers processed by
these foundries are shipped to our subcontractors, where they are assembled into
finished products and electronically tested before delivery to our customers. We
believe that this manufacturing model significantly reduces our capital
requirements and allows us to focus our resources on the design, development and
marketing of our products.
Our principal
wafer foundry is TSMC in Taiwan. We are actively involved with product
development on next-generation processes, and are designing products on TSMC’s
most advanced logic processes. The latest generation of our products employs up
to eight layers of copper interconnect and 300 millimeter wafer
sizes.
Our products
are designed to use industry standard packages and be tested using widely
available automatic test equipment. We develop and control product test programs
used by our subcontractors based on our product specifications. We currently
rely on Amkor Technology, Inc. in Korea, Philippines, and Taiwan, Advanced
Semiconductor Engineering, Inc. in Korea and Taiwan, King Yuan Electronics Co.,
Ltd. in Taiwan, Signetics Corporation in Korea, and ISE Labs, Inc. in the U.S.
to assemble and test our products. We also rely on JSI Shipping to provide
supply chain management services. We also have an office in Taiwan that employs
local personnel to work directly with our Asian wafer manufacturers and assembly
and test houses to facilitate manufacturing operations.
We have
designed and implemented an ISO9001-certified quality management system that
provides the framework for continual improvement of our products, processes and
customer service. We apply well-established design rules and practices for CMOS
devices through standard design, layout and test processes. We also rely on
in-depth simulation studies, testing and practical application testing to
validate and verify our products. We emphasize a strong supplier quality
management practice in which our manufacturing suppliers are pre-qualified by
our operations and quality teams. To ensure consistent product quality,
reliability and yield, we closely monitor the production cycle by reviewing
electrical, parametric and manufacturing process data from each of our wafer
foundries and assembly subcontractors.
We currently
do not have long-term supply contracts with any of our significant third party
manufacturing service providers. We generally place purchase orders with these
providers according to terms and conditions of sales which specify price and
30-day payment terms and which limit the providers’ liability.
Competition
The markets
for our products are highly competitive. We believe that the principal bases of
competition are:
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processing
speed;
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power
dissipation;
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capacity
of the knowledge or signature database that can be
processed;
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advanced
product features allowing OEM and system customer product
differentiation;
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price;
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product
availability and reliability;
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customer
support and responsiveness;
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timeliness
of new product introductions; and
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credibility
in designing and manufacturing
products.
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We believe
that we compete favorably on each of the bases identified above. However, some
of our competitors have greater financial resources and a longer track record as
a semiconductor supplier than we do. We anticipate that the market for our
products will be subject to rapid technological change. As we enter new markets
and pursue additional applications for our products, we expect to face
competition from a larger number of competitors. Within our Layer 2-4
knowledge-based processor, NetLite and network search engine markets, we
primarily compete with Renesas Technology, Corp. In the Layer 7 market, we
primarily compete with certain divisions of LSI Corporation. In the 10-Gigabit
Ethernet physical layer market, we primarily compete with certain divisions of
Applied Micro Circuits Corporation, Broadcom Corporation, Marvell Technology
Group Ltd., Cortina Systems, Inc. and Vitesse Semiconductor Corporation. In the
multi-core processor market, we primarily compete with Applied Micro Circuits
Corporation, Advanced Micro Devices, Inc., Broadcom Corporation, Cavium
Networks, Inc., Freescale Semiconductor, Inc., Intel Corporation, Marvell
Technology Group Ltd., and PMC-Sierra, Inc. We expect to face competition in the
future from our current competitors, other manufacturers and designers of
semiconductors, including large integrated device manufacturers, and innovative
start-up semiconductor design companies.
Intellectual
Property
Our success
and future growth will depend, in part, on our ability to protect our
intellectual property. We rely primarily on patent, copyright, trademark and
trade secret laws to protect our intellectual property. We also attempt to
protect our trade secrets and other proprietary information through agreements
with our customers, suppliers, employees and consultants and through security
protection of our computer network and physical premises. However, these
measures may not provide meaningful protection for our intellectual property.
While our patents and other intellectual property rights are important, we
believe that our technical expertise and ability to introduce new products in a
timely manner will also be important factors in maintaining our competitive
position.
As of January
31, 2010, we held 422 issued U.S. patents and 15 issued
foreign patents with expiration dates ranging from 2011 to 2027. We also
have numerous patent applications pending in the U.S and abroad. We may not
receive any additional patents as a result of these applications or future
applications. Nonetheless, we continue to pursue the filing of additional patent
applications. Any rights granted under any of our existing or future patents may
not provide meaningful protection or any commercial advantage to
us.
Many
participants in the semiconductor industry have a significant number of patents
and have frequently demonstrated a willingness to commence litigation based on
allegations of patent and other intellectual property infringement. From time to
time, we have received, and expect to continue to receive, notices of claims of
infringement or misappropriation of other parties’ proprietary rights. In the
event any such claims result in legal actions, we cannot assure you that we will
prevail in these actions, or that other actions alleging infringement by us of
third party intellectual property rights, misappropriation or misuse by us of
third party trade secrets, or invalidity or unenforceability of our patents will
not be asserted against us or that any assertions of infringement,
misappropriation, misuse, invalidity or unenforceability will not materially and
adversely affect our business, financial condition and results of
operations.
We intend to
protect our rights vigorously, but there can be no assurance that our efforts
will be successful. Thus, despite our precautions, a third party may copy or
otherwise obtain and use our products, services or technology without
authorization, develop similar technology independently or design around our
patents. In addition, effective patent, copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. Moreover,
we often incorporate the intellectual property of third parties into
our designs, which is subject to certain obligations with respect to the
non-use and non-disclosure of such intellectual property. We cannot assure you
that the steps we have taken to prevent infringement, misappropriation or misuse
of our intellectual property or the intellectual property of third parties will
be successful. Furthermore, enforcement of our intellectual property rights may
divert the efforts and attention of our management team and may be costly to
us.
In addition
to our own intellectual property, we also rely on third-party technologies for
the development of our products. We license certain technology from MIPS
Technologies, Inc., pursuant to a license agreement entered into in July 2003
wherein RMI was granted a non-exclusive, worldwide license to MIPS Technologies’
micro-processor core technology to develop, implement and use in its products.
The term of the agreement will expire in July 2017. The agreement
permits us to continue selling in perpetuity products developed during the
term of the agreement containing the licensed technology.
Employees
As of
December 31, 2009, we had 550 full-time employees worldwide, including 324
in research and development, 69 in operations, 114 in sales and
marketing and 48 in general and administrative. None of our employees are
covered by collective bargaining agreements. We believe our relations with our
employees are good.
Available
Information
We organized
our business in 1995 as a California limited liability company and incorporated
in Delaware in 2000. Our Web site address is www.netlogicmicro.com.
The information in our Web site is not incorporated by reference into this
report. Through a link on the Investor Relations section of our Web site, we
make available our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after they are filed with, or
furnished to, the Securities and Exchange Commission.
If
any of the following risks actually occur, our business, results of operations
and financial condition could suffer significantly.
We
have grown rapidly, and a failure to manage any continued growth could reduce
our potential revenue and could negatively impact our future operating
results.
In 2009, we
completed two major acquisitions. In order to successfully implement our overall
growth strategies, we will need to carefully and efficiently manage our planned
expansion. Among other things, this will require us to continue to:
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improve
our products and technology and develop new
technologies;
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manage
new distribution channels;
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manage
an increasing number of complex relationships with our customers, wafer
foundries and other third parties;
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monitor
and improve our operating systems, procedures and financial controls on a
timely basis;
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retain
existing, and hire additional, key management and technical
personnel;
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expand,
train and manage our workforce and, in particular, our research and
development, sales, marketing and support
organizations.
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retain
and expand the customer base for the IDT NSE Business and the RMI product
offerings;
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integrate
and improve the IDT and RMI manufacturing operations;
and
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integrate
and manage the foreign entities acquired in the RMI
acquisition.
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We may not be
able to adequately manage our growth or meet the foregoing objectives. A failure
to do so could jeopardize our future revenue and cause our stock price to
decline. Also, our ability to execute our business plan and grow our business
will be heavily dependent on our management team’s ability to work effectively
together.
Our
operating cash needs have increased substantially as a result of our acquisition
of RMI in October 2009 and other recent acquisitions, and if we are unable to
generate adequate cash flow from our operations to meet these needs, our
liquidity may be impaired.
Although in
recent years we have generated sufficient net cash from operations to meet our
capital requirements, we have become substantially larger with greater operating
cash needs as a result of the RMI and other recent acquisitions. We may be
required to pay up to $15.9 million cash to the former holders of RMI capital
stock as earn-out consideration based upon achieving specified percentages of
revenue targets for either the 12-month period from October 1, 2009 through
September 30, 2010, or the 12-month period from November 1, 2009
through October 31, 2010, whichever period results in the higher percentage
of the revenue target. The earn-out consideration, if any, net of applicable
indemnity claims, will be paid on or before December 31, 2010.
Our future
cash needs will depend on many factors, including the amount of revenue we
generate, the timing and extent of spending to support product development
efforts, the expansion of sales and marketing activities, the timing of
introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products,
and any future business acquisitions that we might undertake. These factors, in
turn, depend in large part on the success of our efforts to integrate the RMI
and IDT NSE businesses we acquired with our own business as it existed prior to
the acquisitions. In the event that we do not achieve the synergies and realize
other benefits we anticipated achieving from these acquisitions, our future cash
needs may be greater than we currently anticipate. We have also incurred and may
continue to incur significant transaction expenses in connection with these
acquisitions and other transactions.
We may seek
additional funding through public or private equity or debt financing, and we
have a shelf registration statement that would allow us to sell up to an
additional amount of approximately $120 million of our securities from time to
time during the next three years. However, additional funding could be
constrained by the terms and covenants under our senior secured credit facility
and may not be available on terms acceptable to us or at all. We also might
decide to raise additional capital at such times and upon such terms as
management considers favorable and in our interests, including, but not limited
to, from the sale of our debt and/or equity securities under our shelf
registration statement, but we cannot be certain that we will be able to
complete offerings of our securities at such times and on such terms as we may
consider desirable for us. Any such financings may be upon terms that are
potentially dilutive to existing stockholders.
We
derive most of our revenue from sales of our knowledge-based processors, and, if
the demand for these products and other products does not grow, we may not
achieve our growth and strategic objectives.
Our
knowledge-based processors are used primarily in networking systems, including
routers, switches, network access equipment and networked storage devices.
Although our recent acquisition of RMI has expanded our product portfolio, we
have historically derived a substantial portion of our total revenue from sales
of our knowledge-based processors and expect to continue to derive a significant
portion of our total revenues from these products for the foreseeable future. We
believe our future business and financial success depends on continued market
acceptance and increasing sales of our knowledge-based processors. In order to
meet our growth and strategic objectives, networking and communications
infrastructure OEMs must continue to incorporate, and increase the incorporation
of, our products into their systems as their preferred means of enabling
network-aware processing of IP packets, and the demand for their systems must
grow as well. We cannot provide assurance that sales of our knowledge-based
processors will increase substantially in the future or that the demand for our
customers’ systems will increase as well. Our future revenues from these
products may not increase in accordance with our growth and strategic objectives
if the OEM customers modify their current product designs or select products
sold by our competitors instead. Thus, the future success of this part of our
business depends in large part on factors outside our control, and sales of our
knowledge-based processors and other products may not meet our revenue growth
and strategic objectives. Additionally, due to the high concentration of our
sales with a small number of OEMs, we cannot guarantee that the demand for the
systems offered by these customers will increase or that our sales will increase
outside this core customer base, and, accordingly, prior quarterly or
annual results may not be an indication of our future revenue growth or
financial results.
Because
we rely on a small number of customers for a significant portion of our total
revenue, the loss of, or a significant reduction in, orders for our products
from these customers would negatively affect our total revenue and
business.
To date, we
have been dependent upon orders for sales our products to a limited number of
customers, and, in particular, Cisco, for most of our total revenue. During the
years ended December 31, 2009, 2008 and 2007, Cisco and its contract
manufacturers accounted for 35%, 38% and 50% of our total revenue, respectively.
In addition, because the market segments served by us and RMI prior to the
acquisition were complementary and some of our significant customer bases
overlapped, the combination of our companies has not reduced our dependency on
sales to some of our significant customers that we share. We expect that our
future financial performance will continue to depend in large part upon our
relationship with Cisco and several other large OEMs.
We cannot
assure you that existing or potential customers will not develop their own
solutions, purchase competitive products or acquire companies that use
alternative methods in their systems. We do not have long-term purchase
commitments from any of our OEM customers or their contract manufacturers.
Although we entered into master purchase agreements with certain significant
customers including Cisco, one of Cisco’s foreign affiliates and a Cisco
purchasing agent, these agreements do not include any long-term purchase
commitments. Cisco and our other customers do business with us currently only on
the basis of short-term purchase orders (subject, in the case of Cisco, to the
terms of the master purchase agreements), which often are cancelable prior to
shipment. The loss of orders for our products from Cisco or other major users of
our products would have a significant negative impact on our
business.
We
face additional risks to our business success and financial condition because of
our dependence on a small number of customers for sales of our
products.
Our
dependence on a small number of customers, especially Cisco and its contract
manufacturers, for most of our revenue in the foreseeable future creates
additional risks for our business, including the following:
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we
may face increased pressure to reduce the average selling prices of our
products;
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we
may find it difficult to pass through increases in our manufacturing and
other direct costs;
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the
reputation of our products in the marketplace may be affected adversely if
Cisco or other OEMs that represent a significant percentage of our sales
of products reduce or cease their use of our products;
and
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we
may face problems in collecting a substantial portion of our accounts
receivable if any of these companies faces financial difficulties or
dispute payments.
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While
we achieved profitability in recent years, we had a net loss in 2009 and a
history of net losses prior to 2005. We may incur significant net losses in the
future and may not be able to sustain profitability.
We reported a
net loss of $47.2 million during the year ended December 31, 2009. We
reported net income of $3.6 million and $2.6 million during the years ended 2008
and 2007, and we have reported net losses in years prior to fiscal 2005. At
December 31, 2009, we had an accumulated deficit of approximately $123.1
million. To regain profitability, we will have to continue to generate
greater total revenue and control costs and expenses. We cannot assure you that
we will be able to generate greater total revenue, or limit our costs and
expenses, sufficiently to sustain profitability on a quarterly or annual basis.
Moreover, if we continue to make acquisitions and other transactions that
generate substantial expenses for acquired intangible assets and similar items
as well acquisition costs, we may not become profitable in the near term even
though we otherwise meet our growth and operting objectives. For
example, for the year ended December 31, 2009 we recorded $62.4 million of
non-cash operating expenses. See “Cash Flows during the Year ended December 31,
2009” in Item 7, Management ‘s Discussion and Analysis of Financial Conditions
and Results of Operations, and Note 2, “Business Combinations and Asset
Purchase” in the Notes to Consolidated Financial Statement.
Because
we sell our products on a purchase order basis and rely on estimated forecasts
of our customers’ needs, inaccurate forecasts could adversely affect our
business.
We sell our
products pursuant to individual purchase orders (subject, in the case of Cisco
and certain key customers, to the terms of a master purchase agreement), and not
pursuant to long-term purchase commitments. Therefore, we rely on estimated
demand forecasts, based upon input from our customers, to determine how much
product to manufacture. Because our sales are based on purchase orders, our
customers may cancel, delay or otherwise modify their purchase commitments with
little or no consequence to them and with little or no notice to us. For these
reasons, we generally have limited visibility regarding our customers’ product
needs. We cannot provide assurance as to the quantities or timing required by
our customers for our products. We cannot assure you that we will not experience
subsequent substantial warranty claims or that warranty claims will not result
in cancellation of existing orders or reluctance of customers to place future
orders. In addition, the product design cycle for networking OEMs is
lengthy, and it may be difficult for us to accurately anticipate when they will
commence commercial shipments of products that include our knowledge-based
processors. Whether in response to changes affecting the industry or a
customer’s specific business pressures, any cancellation, delay or other
modification in our customers’ orders could significantly reduce our revenue,
cause our operating results to fluctuate from period to period and make it more
difficult for us to predict our revenue. In the event of a cancellation or
reduction of an order, we may not have enough time to reduce operating expenses
to minimize the effect of the lost revenue on our business, and we may purchase
too much inventory and spend more capital than expected.
Additionally,
if we overestimate customer demand for our products, we may purchase products
from manufacturers that we may not be able to sell. Conversely, if we
underestimate customer demand or if sufficient manufacturing capacity were
unavailable, we would forego revenue opportunities and could lose market share
in the markets served by our products. In addition, our inability to meet
customer requirements for our products could lead to delays in product
shipments, force customers to identify alternative sources and otherwise
adversely affect our ongoing relationships with our
customers.
We
are dependent on contract manufacturers for a significant portion of our
revenue.
Many of our
OEM customers, including Cisco, use third party contract manufacturers to
manufacture their systems. These contract manufacturers represented 43%, 41% and
65% of our total revenue for the year ended December 31, 2009, 2008 and
2007, respectively. Contract manufacturers purchase our products directly from
us on behalf of OEMs. Although we work with our OEM customers in the design and
development phases of their systems, these OEM customers are gradually giving
contract manufacturers more authority in product purchasing decisions. As a
result, we depend on a concentrated group of contract manufacturers for a
substantial portion of our revenue. If we cannot compete effectively for the
business of these contract manufacturers or if any of the contract
manufacturers, which work with our OEM customers, experience financial or other
difficulties in their businesses, our revenue and our business could be
adversely affected. In particular, if one of our OEM customer’s contract
manufacturers becomes subject to bankruptcy proceedings, neither we nor our OEM
customer may be able to obtain any of our products held by the contract
manufacturer. In addition, we may not be able to recover any payments owed to us
by the contract manufacturer for products already delivered or recover the
products held in the contract manufacturer’s inventory when the bankruptcy
proceeding is initiated. If we are unable to deliver our products to our OEM
customers in a timely manner, our business would be adversely
affected.
The
average selling prices of our products may decline, which could reduce our
revenue and gross margin.
In our
experience the average selling prices of our products and the RMI products sold
by RMI have declined over the course of their commercial lives, principally due
to the supply of competing products, reduction in demand from customers,
pressure from customers to reduce prices and product cycle changes; we expect
these trends to continue. In addition, under our master purchase agreements with
Cisco, we agreed to provide to Cisco all price decreases that we achieve, and
granted to Cisco the right (under limited circumstances) to purchase our
products directly from our manufacturers (subject to payments to us, net of
specified costs). Declining average selling prices can adversely affect our
future operating results. To maintain acceptable operating results, we will need
to develop and introduce new products and product enhancements on a timely basis
and continue to reduce our costs. If we are unable to offset any reductions in
our average selling prices by increasing our sales volumes and achieving
corresponding production cost reductions, or if we fail to develop and introduce
new products and enhancements on a timely basis, our revenue and operating
results will suffer.
We
rely on third parties for the manufacture of our products, and a significant
increase in wafer pricing or our failure to secure sufficient capacity could
limit our growth and adversely affect our operating results.
As a fabless
semiconductor company, we rely on third-party wafer foundries to manufacture our
products. We currently do not have long-term supply contracts with any of the
wafer foundries, including TSMC, and United Microelectronics Corporation, or
UMC. Neither TSMC nor UMC is obligated to perform services or supply products to
us for any specific period, in any specific quantities or at any specific price,
except as may be provided in a particular purchase order. As a result, there are
numerous risks associated with our reliance on these wafer foundries, including
the possibilities that TSMC or UMC may give higher priority to their other
customers or that our relationships with either wafer foundry may deteriorate.
We cannot assure you that TSMC and UMC will continue to provide us with our
products at acceptable yields or in sufficient quantities, for reasonable costs
and on a timely basis to meet our customers’ needs. A failure to ensure the
timely fabrication of our products could cause us to lose customers and could
have a material adverse effect on our operating results.
If either
wafer foundry, and in particular TSMC, ceases to provide us with required
production capacity with respect to our products, we cannot assure you that we
will be able to obtain manufacturing capacity from other wafer foundries on
commercially reasonable terms or that these arrangements, if established, will
result in the successful manufacturing of our products. These arrangements might
require us to share our technology and might be subject to unilateral
termination by the wafer foundries. Even if such capacity is available from
another manufacturer, we would need to convert the production of our integrated
circuits to a new fabrication process and qualify the other manufacturer, which
process could take nine months or longer. Furthermore, we may not be able to
identify or qualify manufacturing sources that would be able to produce wafers
with acceptable manufacturing yields.
Additionally, some of
the network search engine products we acquired from IDT are manufactured for us
by IDT at their wafer fabrication facilities. While IDT is contratually
obligated to manufacture for us certain quantities of these products, we canno
assure you that IDT will continue to honor these commitments, that IDT's
fabrication facility will remain in business or that IDT will be able to always
meet our production demands which may adversly impact our operating
results.
We
also rely on third parties for other products and services, including the
assembly, testing and packing of our products, and engineering services, and any
failure by third parties to provide the tools and services we require could
limit our growth and adversely affect our future operating results.
Our products
are assembled and tested by third-party vendors that require the use of high
performance assembly and test equipment. In addition, in connection with the
design of our products, we use software tools, which we obtain from third party
software vendors, for simulation, layout and other design purposes. Our reliance
on independent assembly, testing, software and other vendors involves a number
of risks, including reduced control over delivery schedules, quality assurance
and costs. We currently do not have long-term supply contracts with any of these
third party vendors. As a result, most of these third party vendors are not
obligated to provide products or perform services to us for any specific period,
in any specific quantities or at any specific price, except as may be provided
in a particular purchase order. The inability of these third party vendors to
deliver high performance products or services of acceptable quality and in a
timely manner, could lengthen our design cycle, result in the loss of our
customers and reduce our revenue.
We also rely
on third party component suppliers to provide custom designed integrated circuit
packages for our products. In some instances, these package designs are provided
by a single supplier. Our reliance on these suppliers involves a number of
risks, including reduced control over delivery schedules, quality assurance and
costs. We currently do not have long-term supply contracts with any of
these package vendors. As a result, most of these third party vendors are not
obligated to provide products or perform services to us for any specific period,
in any specific quantities or at any specific price, except as may be
provided in a particular purchase order. The inability of these third party
vendors to deliver packages of acceptable quality and in a timely manner,
particularly the sole source vendors, could adversely affect our delivery
commitments and adversely affect our operating results or cause them to
fluctuate more than anticipated. Additionally, these packages may require
specialized or high-performance component parts that may not be available in
quantities or in time frames that meet our requirements or the anticipated
requirement of our customers.
In connection
with the design of our products, we have and may license third party
intellectual property, and use third party engineering services. Our reliance on
these third party intellectual property and engineering services providers
involves a number of risks, including reduced control over and quality of the
intellectual property and service deliverables, quality and costs. The inability
of these third party providers to deliver high performance products or services
of acceptable quality and in a timely manner, could lengthen our design cycle,
result in the loss of our customers and reduce our revenue.
Our costs may increase substantially
if the wafer foundries, assembly and test vendors that supply and test our
products do not achieve satisfactory product yields, reliability or
quality.
The wafer
fabrication process is an extremely complicated process where the slightest
changes in the design, specifications or materials can result in material
decreases in manufacturing yields or even the suspension of production. From
time to time, we and our wafer foundries have experienced, and are likely to
continue to experience manufacturing defects and reduced manufacturing yields
related to errors or problems in our wafer foundries’ manufacturing processes or
the interrelationship of their processes with our designs. In some cases, our
wafer foundries may not be able to detect these defects early in the fabrication
process or determine the cause of such defects in a timely manner, which may
affect the quality or reliability of our products. We may incur substantial
research and development expense for prototype or development stage products as
we qualify the products for production.
Generally, in pricing
our products, we assume that manufacturing, assembly and test yields will
continue to increase, even as the complexity of our products increases. Once our
products are initially qualified with our wafer foundries, minimum acceptable
yields are established. We are responsible for the costs of the wafers if the
actual yield is above the minimum. If actual yields are below the minimum, we
are not required to purchase the wafers. The minimum acceptable yields for our
new products are generally lower at first and increase as we achieve full
production. Whether as a result of a design defect or manufacturing, assembly or
test error, unacceptably low product yields or other product manufacturing,
assembly or test problems could substantially increase the overall production
time and costs and adversely impact our operating results on sales of our
products. Product yield losses will increase our costs and reduce our gross
margin. In addition to significantly harming our operating results and cash
flow, poor yields may delay shipment of our products and harm our relationships
with existing and potential customers.
To
be successful we must continue to develop and have manufactured for us,
innovative products to meet the evolving requirements of networking
OEMs.
To remain
competitive, we devote substantial resources to research and development, both
to improve our existing technology and to develop new technology. We also seek
to improve the manufacturing processes for our products, including the use of
smaller process geometries, which we believe is important for our products to
serve our OEM customers’ requirements for enhanced processing. Our failure to
migrate our products to processes at smaller process geometries could
substantially reduce the future competitiveness of our products. In addition,
from time to time, we may have to redesign some of our products or modify the
manufacturing process for them. We cannot give you any assurance that we will be
able to improve our existing technology or develop and integrate new technology
into our products. Even if we design better products, we may encounter problems
during the manufacturing or assembly process, including reduced manufacturing
yields, production delays and increased expenses, all of which could adversely
affect our business and results of operations.
In addition,
given the highly complex nature of these products, even the slightest change or
adjustment to our integrated circuit designs could require substantial resources
to implement them. We may not be able to make these changes or adjustments to
our products or correct any errors or defects arising from their implementation.
Failure to make these changes or adjustments or correct these errors or defects
during the product development stages, or any resulting delays, could severely
harm our existing and potential customer relationships and could likely increase
our development costs, adversely affecting our operating results. If these
changes, adjustments, errors or defects are not identified or requested until
after commercial production has begun or after products have been delivered to
customers, we may be required to re-test existing inventory, replace products
already shipped or re-design the products, all of which would likely result in
significant time delays and additional costs and expenses.
We
have sustained substantial losses from low production yields in the past and may
incur such losses in the future.
Designing and
manufacturing integrated circuits is a difficult, complex and costly process.
Once research and development has been completed and the foundry begins to
produce commercial volumes of the new integrated circuit, products still may
contain errors or defects that could adversely affect product quality and
reliability. We have experienced low yields and have incurred substantial
research and development expenses in the design and initial production phases of
all of our products, and similar problems have historically been experienced in
the production of the RMI products by RMI. We cannot assure you that we will not
experience low yields, substantial research and development expenses, product
quality, reliability or design problems, or other material problems with our
products that we have shipped or may ship in the future.
If
we fail to retain key personnel and hire additional personnel, our business and
growth could be negatively affected.
Our business
has been dependent to a significant degree upon the services of a small number
of executive officers and technical employees. We generally do not have
non-competition agreements or term employment agreements with any of our
executive officers, whom we generally employ at will. We do not maintain key-man
life insurance on the lives of any of our key personnel. The loss of any of
these individuals could negatively impact our technology development efforts and
our ability to service our existing customers and obtain new
customers.
Our future
growth will also depend, in part, upon our ability to recruit and retain other
qualified managers, engineers and sales and marketing personnel. There is
intense competition for these individuals in our industry, and we cannot assure
you that we will be successful in recruiting and retaining these individuals. If
we are unable to recruit and retain these individuals, our technology
development and sales and marketing efforts could be negatively
impacted.
If
we fail to maintain competitive equity compensation packages for our employees,
or if our stock price declines materially for a protracted period of time, we
might have difficulty retaining our employees and our business may be
harmed.
In today’s
competitive technology industry, employment decisions of highly skilled
personnel are influenced by equity compensation packages, which offer incentives
above traditional compensation only where there is a consistent, long-term
upward trend over time of a company’s stock price. If our stock price declines
due to market conditions, investors’ perceptions of the technology industry or
managerial or performance problems we have, our equity compensation incentives,
especially stock options may lose value to key employees, and we may lose these
employees or be forced to grant additional equity compensation incentives to
retain them. This in turn could result in:
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immediate
and substantial dilution to investors resulting from the grant of
additional equity awards necessary to retain employees;
and
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potential
compensation charges against the company, which could negatively impact
our operating results.
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Additionally,
if we fail to provide an adequate amount of equity consideration to new and
existing employees we may be unable to compete for new talent and retain our
existing talent. The number of shares available for grant under our 2004 Equity
Incentive Plan (the “Plan”) may not be adequate enough to continue to enable us
to competitively compensate our employees, and if we are unable to obtain from
our stockholders an increase in the number of shares authorized under the Plan
either in fiscal year 2010 or fiscal year 2011, we may not be able to retain our
employees which could significantly impact our operating results.
A
failure to successfully address the potential difficulties associated with
international business could reduce our growth, increase our operating costs and
negatively impact our business.
We conduct a
significant amount of our business with companies that operate primarily outside
of the United States, and intend to increase sales to companies operating
outside of the United States. For example, our customers based outside the
United States accounted for 75%, 67% and 56% of our total revenue during the
years ended December 31, 2009, 2008 and 2007, respectively. Not only are
many of our customers located abroad, but our two wafer foundries are based in
Taiwan, and we outsource the assembly and some of the testing of our products to
companies based in Taiwan and Hong Kong. We face a variety of challenges in
doing business internationally, including:
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foreign
currency exchange fluctuations;
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compliance
with local laws and regulations that we not be familiar
with;
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unanticipated
changes in local regulations;
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potentially
adverse tax consequences, such as withholding
taxes;
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timing
and availability of export and import
licenses;
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political
and economic instability;
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reduced
or limited protection of our intellectual
property;
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protectionist
laws and business practices that favor local competition;
and
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additional
financial risks, such as potentially longer and more difficult collection
periods.
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Because we
anticipate that we will continue to rely heavily on foreign based customers for
our future growth, the occurrence of any of the circumstances identified above
could significantly increase our operating costs, delay the timing of our
revenue and harm our business and financial condition.
We
must design our products to meet the needs of our OEM customers and convince
them to use our products, or our revenue will be adversely
affected.
In general,
our OEM customers design our products into their equipment during the early
stages of their development after an in-depth technical evaluation of both our
and our competitors’ products. These design wins are critical to the success of
our business. In competing for design wins, if a competitor’s product is already
designed into the product offering of a potential customer, it becomes very
difficult for us to sell our products to that customer. Changing suppliers
involves additional cost, time, effort and risk for the customer. In addition,
our products must
comply with the continually evolving specifications of our OEMs. Our ability to
compete in the future will depend, in large part, on our ability to comply with
these specifications. As a result, we expect to invest significant time and
effort and to incur significant expense to design our products to ensure
compliance with relevant specifications. Even if an OEM designs our products
into its systems, we cannot assure you that its systems will be commercially
successful or that we will receive significant revenue from sales our products
for those systems.
Factors
that negatively affect the businesses of our targeted OEMs that use or could use
our products could negatively impact our total revenue.
The timing
and amount of our revenue depend on the ability of our targeted OEMs who use our
products to market, produce and ship systems incorporating our technology.
Factors that negatively affect a significant customer or group of customers
could negatively affect our results of operations and financial condition. Many
issues beyond our control influence the success of our targeted OEMs that use
our products, including, for example, the highly competitive environment in
which they operate, the strength of the markets for their products, their
engineering capabilities, their ability or inability to obtain other components
from other suppliers, the compatibility of any of their other components with
our products, the impact of a worldwide recession on their capital spending and
sales of their equipment, and their financial and other resources. Likewise, we
have no control over their product development or pricing strategies, which
directly affect sales of their products and, in turn, our revenue. A decline in
sales of our OEM customers’ systems that use our products would reduce our
revenue. In addition, seasonal and other fluctuations in demand for their
products could cause our operating results to fluctuate, which could cause our
stock price to fall.
We
have a lengthy sales cycle, which may result in significant expenses that do not
generate significant revenue or delayed revenue generation from our selling
efforts and limits our ability to forecast our revenue.
We expect
that our product sales cycle, which results in our products being designed into
our customers’ products, could take over 24 months. It can take an additional
nine months to reach volume production of these products. A number of factors
can contribute to the length of the sales cycle, including technical evaluations
of our products by our OEMs, the design process required to integrate our
products into our OEM customers’ products and the timing of our OEMs’ new
product announcements. In anticipation of product orders, we may incur
substantial costs before the sales cycle is complete and before we receive any
customer payments. As a result, in the event that a sale is not completed or is
cancelled or delayed, we may have incurred substantial expenses, making it more
difficult for us to become profitable or otherwise negatively impacting our
financial results. Furthermore, because of our lengthy sales cycle, our receipt
of revenue from our selling efforts may be substantially delayed, our ability to
forecast our future revenue may be more limited and our revenue may fluctuate
significantly from quarter to quarter.
Our
operating results could be adversely affected if we have to satisfy product
warranty or liability claims.
If our
products are defective or malfunction, we could be subject to product warranty
or product liability claims that could have significant related warranty charges
or warranty reserves in our financial statements. Further, we may spend
significant resources investigating potential product design, quality and
reliability claims, which could result in additional charges in our financial
statements until such claims are resolved. We cannot guarantee that warranty
reserves will either increase or decrease in future periods. Further, in
connection with the master purchase agreements that we entered into with Cisco
in 2005, we agreed to extended product warranties for the benefit of Cisco.
Specifically, we agreed to general three-year warranties and, in the case of
epidemic failures, to five-year warranties. In addition, under the Cisco
agreements, we have agreed to indemnify Cisco for costs incurred in rectifying
epidemic failures, up to the greater of (on a per claim basis) 25% of all
amounts paid to us by Cisco during the preceding 12 months (approximately, $15.4
million at December 31, 2009) or $9.0 million, plus replacement costs. If we are
required to make payments under this indemnity, our operating results may be
adversely affected. Moreover, these claims in the future, regardless of their
outcome, could adversely affect our business.
Our
revenue and operating results may fluctuate significantly from period to period,
on a quarterly or annual basis, causing volatility in our stock
price.
Our total
revenue and operating results have fluctuated from quarter to quarter in the
past and are expected to continue to do so in the future. As a result, you
should not rely on quarter-to-quarter comparisons of our operating results as an
indication of our future performance. Fluctuations in our total revenue and
operating results could negatively affect the trading price of our stock. In
addition, our total revenue and results of operations may, in the future, be
below the expectations set by us or of analysts and investors, which could cause
our stock price to decline. Factors that are likely to cause our revenue and
operating results to fluctuate include, for example, the periodic costs
associated with the generation of mask sets for new products and product
improvements and the risk factors discussed throughout this section. Additional
factors that could cause our revenue and operating results to fluctuate from
period to period include:
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foreign
currency exchange fluctuations;
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the
timing and volume of orders received from our
customers;
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market
demand for, and changes in the average selling prices of, our
products;
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the
rate of qualification and adoption of our products by networking
OEMs;
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fluctuating
demand for, and lengthy life cycles of, the products and systems that
incorporate our products;
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the
market success of the OEMs’ systems that incorporate our
products;
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the
ability of our wafer foundries to supply us with production capacity and
finished products to sell to our OEM
customers;
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changes
in the level of our costs and operating
expenses;
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our
ability to receive our manufactured products from our wafer foundries and
ship them within a particular reporting
period;
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deferrals
or cancellations of customer orders in anticipation of the development and
commercialization of new technologies or for other
reasons;
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changes
in our product lines and revenue
mix;
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the
timing of the introduction by others of competing, replacement or
substitute products technologies;
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our
ability or the ability of our OEM customers that use our products to
procure required components or fluctuations in the cost of such
components;
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cyclical
fluctuations in semiconductor or networking markets;
and
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general
economic conditions that may affect end-user demand for products that use
our products.
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In
addition, RMI’s business has historically been subject to seasonality, which may
cause us to experience greater fluctuation of our revenues following the
acquisition.
The
cyclical nature of the semiconductor industry and the networking markets could
adversely affect our operating results and our business.
We expect our
business to be subject to the cyclicality of the semiconductor industry,
especially the market for communications integrated circuits. Historically,
there have been significant downturns in this industry segment, characterized by
reduced demand for integrated circuits and accelerated erosion of average
selling prices. At times, these downturns have lasted for prolonged periods of
time. Furthermore, from time to time, the semiconductor industry also has
experienced periods of increased demand and production constraints, in which
event we may not be able to have our products produced in sufficient quantities,
if at all, to satisfy our customers’ needs. It is likely that the communications
integrated circuit business will experience similar downturns in the future and
that, during such times, our business could be affected adversely. It is also
likely that the semiconductor industry will experience periods of strong demand.
We may have difficulty in obtaining enough products to sell to our
customers or may face substantial increases in the wafer prices charged by our
foundries.
In addition,
the networking industry from time to time has experienced and may experience a
pronounced downturn. To respond to a downturn, many networking service providers
may be required to slow their research and development activities, cancel or
delay new product developments, reduce their workforces and inventories and take
a cautious approach to acquiring new equipment and technologies from networking
OEMs, which would have a significant negative impact on our business. In the
future, a downturn in the networking industry may cause our operating results to
fluctuate significantly from year to year, which also may tend to increase the
volatility of the price of our common stock.
We
may not be able to protect and enforce our intellectual property rights, which
could impair our ability to compete and reduce the value of our
technology.
Our success
and future revenue growth depend, in part, on our ability to protect our
intellectual property. We rely primarily on patent, copyright, trademark and
trade secret laws, as well as confidentiality procedures, to protect our
proprietary technologies and processes. However, these measures may not provide
meaningful protection for our intellectual property.
We cannot
assure you that any patents will issue from any of our pending applications. Any
rights granted under any of our existing or future patents may not provide
meaningful protection or any commercial advantage to us. For example, such
patents could be challenged or circumvented by our competitors or declared
invalid or unenforceable in judicial or administrative proceedings. The failure
of any patents to adequately protect our technology would make it easier for our
competitors to offer similar products. We do not have foreign patents or pending
applications corresponding to many of our U.S. patents and patent applications,
including in some foreign countries where our products are sold or may be sold
in the future. Even if foreign patents are granted, effective enforcement
in foreign countries may not be available.
With respect
to our other proprietary rights, it may be possible for third parties to copy or
otherwise obtain and use our proprietary technology or marks without
authorization or to develop similar technology independently. Monitoring
unauthorized use of our proprietary technology or marks is difficult and costly,
and we cannot be certain that the steps we have taken will prevent
misappropriation or unauthorized use of our technology or marks. In addition,
effective patent, copyright, trademark and trade secret protection may not be
available or may be limited in certain foreign countries. Many companies based
in the U.S. have encountered substantial infringement problems in foreign
countries, including countries in which we sell products. Our failure to
effectively protect our intellectual property could reduce the value of our
technology and could harm our business, financial condition and operating
results.
Furthermore,
we have in the past and may in the future initiate claims or litigation against
third parties to determine the validity and scope of proprietary rights of
others. In addition, we may in the future initiate litigation to enforce our
intellectual property rights or the rights of our customers or to protect
our trade secrets. Litigation by us could result in significant expense and
divert the efforts of our technical and management personnel and could
materially and adversely affect our business, whether or not such litigation
results in a determination favorable to us.
Any
claim that our products or our proprietary technology infringe third party
intellectual property rights could increase our costs of operation and distract
management and could result in expensive settlement costs.
The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in often
protracted and expensive litigation. From time to time, we are involved in
litigation relating to intellectual property rights. In addition, we have
received notices from time to time that claim we have infringed upon or
misappropriated intellectual property rights owned by others. We typically
respond when appropriate and as advised by legal counsel. We cannot assure you
that parties will not pursue litigation with respect to those allegations. We
may, in the future, receive similar notices, any of which could lead to
litigation against us. For example, parties may initiate litigation based
on allegations that we have infringed their intellectual property rights or
misappropriated or misused their trade secrets or may seek to invalidate or
otherwise render unenforceable one or more of our patents. Litigation against us
can result in significant expense and divert the efforts of our management,
technical, marketing and other personnel, whether or not the litigation results
in a determination adverse to us. We cannot assure you that we will be able to
prevail or settle any such claims or that we will be able to do so at a
reasonable cost. In the event of an adverse result in any such litigation, we
could be required to pay substantial damages for past infringement and royalties
for any future use of the technology. In addition, we may be required to cease
the sale of certain products, recall certain products from the market, redesign
certain products offered for sale or under development or cease the use of
certain marks or names. We cannot assure you that we will be able to
successfully redesign our products or do so at a reasonable cost. Additionally,
we have in the past sought and may in the future seek to obtain a license to a
third party’s intellectual rights and have granted and may in the future grant a
license to certain of our intellectual property rights to a third party in
connection with a cross-license agreement or a settlement of claims or actions
asserted against us. However, we cannot assure you that we would be able to
obtain a license on commercially reasonable terms, or at all
Our customers
could also become the target of litigation relating to the patent and other
intellectual property rights of others. This could trigger technical support and
indemnification obligations in some of our license or customer agreements. These
obligations could result in substantial expenses, including the payment by us of
costs and damages related to claims of patent infringement. In addition to the
time and expense required for us to provide support or indemnification to our
customers, any such litigation could disrupt the businesses of our customers,
which in turn could hurt our relations with our customers and cause the sale of
our products to decrease. We cannot assure you that claims for indemnification
will not be made or that if made, such claims would not have a material adverse
effect on our business, operating results or financial condition. We do not have
any insurance coverage for intellectual property infringement claims for which
we may be obligated to provide indemnification. If we are obligated to pay
damages in excess of, or otherwise outside of, our insurance coverage, or if we
have to settle these claims, our operating results could be adversely
affected.
If
we are unable to compete effectively, our revenue and market share may be
reduced.
Our business
is extremely competitive, especially during the design-in phase of our
customers’ design cycles. We compete with large semiconductor manufacturers,
many of which have more established reputations, more diverse customer
bases and greater financial and other resources than we do. In addition, our OEM
customers may design their own integrated circuits to address their system
needs. As we develop new applications for our products and expand into new
markets, we expect to face even greater competition. Our present and future
competitors may be able to better anticipate customer and industry demands and
to respond more quickly and efficiently to those demands, such as with product
offerings, financial discounts or other incentives. Furthermore, our OEM
customers may be able develop or acquire integrated circuits that satisfy their
needs faster or most cost effectively than we can. We cannot assure you that we
will be able to compete effectively against these and our other competitors. If
we do not compete effectively, our revenue and market share may
decline.
Our
success may depend on our ability to comply with new or evolving industry
standards applicable to our products or our business.
Our ability
to compete in the future may depend on our ability to ensure that our products
comply with evolving industry standards affecting our customers’ equipment and
other markets in which we compete. In addition, from time to time, new industry
standards may emerge which could render our products incompatible with the
products of our customers or suppliers. In order to ensure compliance with the
relevant standards, we may be required to devote significant time, capital and
other resources to modify or redesign our existing products or to develop new
products. We cannot assure you that we will be able to develop products which
comply with prevailing standards. If we are unable to develop these products in
a timely manner, we may miss significant business opportunities, and our revenue
and operating results could suffer.
If
an earthquake or other natural disaster disrupts the operations of our third
party wafer foundries or other vendors located in high risk regions, we could
experience significant delays in the production or shipment of our
products.
TSMC and UMC,
which manufacture our products, along with most of our vendors who handle the
assembly and testing of our products, are located in Asia. The risk of an
earthquake in the Pacific Rim region is significant due to the proximity of
major earthquake fault lines. In September 1999, a major earthquake in Taiwan
affected the facilities of several of these third party vendors, as well as
other providers of these services. As a result of this earthquake, these vendors
suffered power outages and disruptions that impaired their production capacity.
In March 2002 and September 2003, additional earthquakes occurred in Taiwan. The
occurrence of additional earthquakes or other natural disasters could result in
the disruption of the wafer foundry or assembly and test capacity of the third
parties that supply these services to us. We may not be able to obtain alternate
capacity on favorable terms, if at all.
Any
future acquisitions we make could disrupt our business, and harm our financial
condition and dilute our stockholders.
In the
future, we may consider additional opportunities to acquire other businesses or
technologies that would complement our current offerings, expand the breadth of
our markets or enhance our technical capabilities. Acquisitions present a
significant number of potential challenges that could, if not met, disrupt our
business operations, increase our operating costs, reduce the value to us of the
acquired company or business, including:
|
•
|
integration
of the acquired employees, operations, technologies and products with our
existing business and products;
|
|
•
|
focusing
management’s time and attention on our existing core
business;
|
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•
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retention
of business relationships with suppliers and customers of the acquired
company;
|
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•
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entering
markets in which we may lack prior
experience;
|
|
•
|
retention
of key employees of the acquired company or
business;
|
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•
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amortization
of intangible assets, write-offs, stock-based compensation and other
charges relating to the acquired business and our acquisition costs;
and
|
|
•
|
dilution
to our existing stockholders from the issuance of additional shares of
common stock or reduction of earnings per outstanding share in connection
with an acquisition that fails to increase the value of our
company.
|
We cannot
provide assurances, however, that this acquisition or future acquisitions that
we might make will achieve our business objectives or increase our value or the
price of our common stock.
RISKS
RELATING TO OUR RECENT ACQUISITION OF RMI CORPORATION
The
integration of RMI may not be completed successfully, cost-effectively or on a
timely basis.
As a result
of our acquisition of RMI in October 2009, we have significantly more assets,
operations and employees to manage than we did prior to the acquisition. The
integration process has required us to significantly expand the scope of our
operations and financial systems, and there is a significant degree of
difficulty and management involvement inherent in that process. These
difficulties include, among others:
|
•
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the
diversion of management’s attention from the day-to-day operations of the
combined company;
|
|
•
|
the
assimilation of RMI employees and the integration of two business
cultures;
|
|
•
|
challenges
in attracting and retaining key
personnel;
|
|
•
|
the
integration of information, accounting, finance, sales, billing, payroll
and regulatory compliance systems;
|
|
•
|
challenges
in keeping existing customers and obtaining new customers;
and
|
|
•
|
challenges
in combining product offerings and sales and marketing
activities.
|
There is no
assurance that we will successfully or cost-effectively integrate RMI’s
operations with our own. For example, the costs of achieving systems integration
may substantially exceed our current estimates. As a non-public company, RMI did
not have to comply with the requirements of the Sarbanes-Oxley Act of 2002 for
internal control and other procedures. Integrating its systems and activities
with ours in order to ensure our continued compliance with those requirements
may continue to cause us to incur substantial additional expense. In addition,
the integration process may cause an interruption of, or loss of momentum in,
the activities of our business. If our management is not able to effectively
manage the integration process, or if any significant business activities are
interrupted as a result of the integration process, our business could suffer
and our results of operations and financial condition may be
harmed.
We
may not be able to realize the anticipated synergies and other benefits we
expect to achieve from the acquisition of RMI within the timeframe that is
currently expected, or at all.
Strategic
transactions like our acquisition of RMI create numerous uncertainties and
risks. As a result, the combined company may not be able to realize the expected
revenue growth and other benefits and synergies that we sought to achieve from
the acquisition. We believe that the businesses conducted by us and RMI prior to
the merger were complementary in a number of respects and that the combined
company can take advantage of synergies, economies of scale and other benefits
in the following areas, among others:
|
•
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market
expansion;
|
|
•
|
increased
sales to existing customers;
|
|
•
|
product
and technology synergies;
|
|
•
|
operational
and manufacturing synergies;
|
|
•
|
research
and development synergies;
|
|
•
|
expansion
of intellectual property and patent
portfolio;
|
|
•
|
geographic
synergies; and
|
|
•
|
cultural
synergies.
|
However,
these anticipated benefits and synergies are based on projections and
assumptions, not actual experience, and actual results may deviate from our
expectations for a variety of reasons, including those discussed in this
section.
We
may not be successful in our expansion into the current markets for RMI products
and in addressing the new opportunities we expect to arise out of the
combination.
RMI
historically designed and developed high performance, power-optimized processor
solutions for several target markets: infrastructure equipment, enterprise
systems, security and storage appliances, data center systems and industrial and
connected media devices. Because the RMI products serve some different markets
than our products historically did, we did not have experience competing in
these prior to the acquisition. The success of our expansion into these new
markets will depend on a number of factors, including:
|
•
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our
ability to leverage each company’s successes to provide synergistic
solutions to key customers and
applications;
|
|
•
|
our
ability to assimilate and retain key RMI personnel who have expertise in
conducting RMI’s business;
|
|
•
|
our
ability to preserve and grow RMI’s existing customer, distributor and
ecosystem partner relationships;
|
|
•
|
our
ability to design and develop innovative products and solutions in these
new markets and to continue RMI’s success in achieving “design wins” with
key customers;
|
|
•
|
our
ability to provide high quality customer services and support;
and
|
|
•
|
our
ability to compete effectively against a larger number and broader range
of competitors resulting from our entry into new
markets.
|
In
addition to the current markets for RMI products, we believe that the combined
company is poised to address new opportunities in areas such as high-performance
switching and routing control plane processing and the high-volume, ultra
low-power embedded processing market for enterprise, industrial and connected
media applications. If we are unsuccessful in expanding into these new market
opportunities, we may not achieve the sales and revenue growth we had expected
from the acquisition.
There
is no assurance that we will be able to continue or expand upon RMI’s past
success with customer design wins following the acquisition.
RMI achieved
strategic design wins at a wide range of leading customers such as
Alcatel-Lucent, Aruba, CheckPoint, Cisco, Datang Mobile, Dell, Fujitsu, HP,
Huawei, Huawei-Symantec, Hangzhou H3C Technologies Co. Ltd, IBM, Juniper, LG,
McAfee, Motorola, NEC, Samsung, Sun and ZTE, among others. There is no assurance
that we will be able to replicate or improve upon RMI’s success in obtaining
design wins from these and other customers following the acquisition. This
uncertainty is compounded by the fact that RMI does not have long-term
commitments from any of its existing customers. These product design processes
can be lengthy, as the customers of RMI products usually require a comprehensive
technical evaluation of its products before they incorporate them into their
designs. If a customer’s system designer initially chooses a competitor’s
product, it becomes significantly more difficult to sell RMI’s products for use
in that system because changing suppliers can involve significant cost, time,
effort and risk for RMI’s customers. Our failure to win a competitive design
opportunity can result in foregoing revenues from a given customer’s product
line for the life of that product. In addition, design opportunities may be
infrequent or may be delayed. We expect to invest significant time and resources
and to incur significant expenses to design RMI products to ensure compliance
with relevant specifications, but even with these efforts we may have limited
success in securing customer design wins for a number of reasons, including our
management’s lack of experience with the markets served by RMI’s products, our
failure to retain key RMI personnel involved in the customer design process and
our failure to establish employee incentives and otherwise operate the RMI
business in a manner that continues to place high priority on customer design
wins. Our ability to compete in the markets in which RMI competed will depend,
in large part, on our ability to continue to design products to ensure
compliance with RMI customers’ and potential customers’ specifications and to
secure design wins.
Even
if we are successful in achieving customer design wins for RMI products, we may
not realize the revenue growth and other benefits we expect to achieve from the
acquisition.
The
nature of the design process for RMI products requires that significant expenses
be incurred prior to recognizing revenues associated with those expenses, which
may harm our financial results. Even if a customer designs one of RMI’s products
into its product offering, we cannot be assured that its product will be
commercially successful, that we will receive any revenues from that
manufacturer or that a successor design will include an RMI product. As a
result, we may be unable to accurately forecast the volume and timing of orders
and revenues associated with any new product introductions, which could
adversely affect our results of operations. If we are unable to realize the
revenue growth we expect to achieve from customer design wins for RMI products,
we may not achieve the operational results we anticipate following the
acquisition and our business may be adversely impacted.
We
may experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration for the
semiconductor solutions provided by RMI products, which may result in reduced
manufacturing yields, delays in product deliveries, increased expenses and loss
of design wins and sales.
We have
substantial experience in transitioning the manufacturing processes for our
products to each new generation of smaller geometry process technologies and
believes that it will be necessary to migrate RMI’s products to such smaller
geometries as well. Any transition would require us to redesign the applicable
product and require us and our foundry partners to use new or modified
manufacturing processes for the product. The smallest geometry process that RMI
used for any semiconductors is 80 nanometer, but we expect the next generation
semiconductors to be based on a 40 nanometer process. Because of our lack of
experience with the RMI products and technology, we may not be as successful in
migrating these products to smaller geometry process technologies as we have
been with our own products. We will also depend on our relationships with
foundry subcontractors to transition to smaller geometry processes successfully.
If we experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration for RMI
products, we may experience reduced manufacturing yields, delays in product
deliveries, increased expenses and loss of design wins and sales, any of which
could prevent us from realizing the anticipated benefits from the
acquisition.
We
expect to rely on third-party technologies for the development of the RMI
products, and our inability to use these technologies in the future could harm
our ability to compete in the markets for these products.
We rely
on third parties for technologies that are integrated into the RMI products,
such as wafer fabrication and assembly and test technologies used by its
contract manufacturers, as well as licensed MIPS architecture technologies. If
we are unable to continue to use or license these technologies on reasonable
terms, or if these technologies fail to operate properly following the
acquisition, we may not be able to secure alternatives in a timely manner, and
our ability to remain competitive in the markets served by these products would
be harmed. In addition, the MIPS license requires that certain improvements be
made available to the community of all of MIPS’ licensees, which could
conceivably reduce the proprietary advantage that we will have with this
architecture. If we are unable to license technology from third parties on
commercially reasonable terms in order to continue to develop current products
or to develop future products for the markets served by the RMI products, we may
not be able to develop these products in a timely manner or at all.
Our
operating results will depend in part on the growth of developing sectors of the
connected media market historically served by RMI.
The RMI
business has been highly dependent on developing sectors of the connected media
market, including portable media players, personal navigation devices,
automobile infotainment devices and home media players. The connected media
market is highly competitive and is characterized by, among other things,
frequent introductions of new products and short product life cycles. If the
target markets for the RMI products within these markets do not grow as rapidly
or to the extent anticipated, the combined company’s business could suffer. RMI
derived a significant portion of its revenues from the sale of its semiconductor
solutions for use in emerging connected media applications. Our ability to
sustain and increase revenue is in large part dependent on the continued growth
of these rapidly evolving market sectors, whose future is largely uncertain.
Many factors could impede or interfere with the expansion of these connected
media market sectors, including a slowdown in overall consumer spending,
consumer demand in these sectors, general economic conditions, other competing
consumer electronic products and insufficient interest in new technology
innovations. Any of these dynamics in the consumer electronics market could harm
future sales of the RMI products and prevent us from realizing the anticipated
benefits of our acquisition of RMI.
We
are subject to governmental export and import controls that could subject us to
liability or impair our ability to compete in foreign markets.
Because
we incorporate encryption technology into our multi-core
products, some of these products are subject to United States
export controls and may be exported outside the United States only with the
required level of export license or through an export license exception. In
addition, various countries regulate the import of certain encryption technology
and have enacted laws that could limit our ability to introduce products or
could limit our customers’ ability to implement our products in those countries.
Changes in our products or changes in export and import regulations may create
delays in the introduction of our products in international markets, prevent our
customers with international operations from deploying our products throughout
their global systems or, in some cases, prevent the export or import of our
products to certain countries altogether. Any change in export or import
regulations or related legislation, shift in approach to the enforcement or
scope of existing regulations, or change in the countries, persons or
technologies targeted by such regulations, could result in decreased use of our
products by, or an inability to export or sell our products to, existing or
prospective customers with international operations and harm our
business.
RISKS
RELATING TO OUR COMMON STOCK
In
connection with our acquisition of RMI in October 2009, we issued a substantial
number of shares of common stock around the time of closing and we may be
required to additional shares before December 31, 2010, which would further
dilute the ownership interests of our other stockholders.
In connection
with the acquisition of RMI, we issued or reserved for issuance 5.0 million
shares of our common stock at closing as merger consideration to RMI
stockholders and as incentive stock awards to RMI employees. We may be required
issue up to 1.6 million additional shares to former RMI stockholders as earn-out
consideration before December 31, 2010, if the maximum earn-out is
achieved. Our issuance of additional shares of common stock as earn-out
consideration may result in substantial percentage dilution of the ownership
interests of our other stockholders at that time. Our issuance of shares in
connection with the RMI acquisition also may have an adverse impact on our net
earnings per share in fiscal periods that include (or follow) the date of the
acquisition, as we anticipate that the transaction will be dilutive on the basis
of net earnings per common share for the foreseeable future following the
acquisition.
The
price of our stock could decrease as a result of shares being sold in the
market, including sales by former RMI stockholders who received shares in
connection with our acquisition of RMI.
Sales of a
substantial number of shares of common stock in the public market could
adversely affect the prevailing market price of our common stock from time to
time. Substantially all the shares of our common stock currently outstanding are
eligible for sale in the public market but sales by our affiliates will be
subject to conditions of Rule 144 (other than holding period requirements)
including the volume restrictions set forth in SEC Rule 144(e).
Additionally,
as the shares of common stock we issued in our acquisition of RMI become
eligible for resale, the sale of those shares could adversely impact our stock
price. All of the shares of our common stock issued as merger consideration on
the closing date are subject to a complete trading lock-up through
April 30, 2010, and 50% of those shares will be subject to a complete
trading lock-up through October 30, 2010. In addition, 50% of the
restricted stock units that we issued to certain RMI employees at closing will
vest on April 30, 2010 and the remaining 50% will vest on October 30,
2010. These equity incentive shares will be registered and will therefore
generally not be subject to resale restrictions under federal securities laws.
Accordingly, a substantial number of shares of our common stock will become
eligible for resale on April 30 and October 30, 2010. Our stock price
may suffer a significant decline as a result of the sudden increase in the
number of shares sold in the public market or market perception that the
increased number of shares available for sale will exceed the demand for our
common stock.
Our
stock price could drop, and there could be significantly less trading activity
in our stock, if securities or industry analysts downgrade our stock or do not
publish research or reports about our business.
Our stock
price and the trading market for our stock are likely to be affected
significantly by the research and reports concerning our company and our
business which are published by industry and securities analysts. We do not have
any influence or control over these analysts, their reports or their
recommendations. Our stock price and the trading market for our stock could be
negatively affected if any analyst downgrades our stock, publishes a report
which is critical of our business, or discontinues coverage of us.
Our
common stock has experienced substantial price volatility.
Our common
stock has experienced substantial price volatility. Such volatility may occur in
the future, particularly because of quarter-to-quarter variations in our actual
or anticipated financial results, or the reported financial results of other
semiconductor companies or our customers. Stock price volatility may also result
from product announcements by us or our competitors, or from changes in
perceptions about the various types of products we manufacture and sell. In
addition, our stock price may fluctuate due to price and volume fluctuations in
the stock market, especially in the technology sector.
Provisions
of our certificate of incorporation and bylaws, Delaware law and customer
agreements might delay or prevent a change of control transaction and depress
the market price of our stock.
Various
provisions of our certificate of incorporation and bylaws might have the effect
of making it more difficult for a third party to acquire, or discouraging a
third party from attempting to acquire, control of us. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock. Certain of these provisions eliminate cumulative
voting in the election of directors, limit the right of stockholders to call
special meetings and establish specific procedures for director nominations by
stockholders and the submission of other proposals for consideration at
stockholder meetings.
We are also
subject to provisions of Delaware law which could delay or make more difficult a
merger, tender offer or proxy contest involving us. In particular,
Section 203 of the Delaware General Corporation Law prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless specific conditions are met.
Any of these provisions could have the effect of delaying, deferring or
preventing a change in control, including, without limitation, discouraging a
proxy contest or making more difficult the acquisition of a substantial
block of our common stock.
Our board of
directors might issue up to 50,000,000 shares of preferred stock without
stockholder approval on such terms as the board might determine. The rights of
the holders of common stock will be subject to, and might be adversely affected
by, the rights of the holders of any preferred stock that might be issued in the
future.
Under our
master purchase agreements with Cisco, in the event of, among other things, the
transfer of at least 50% of our voting control to a Cisco competitor that
generates less than 50% of its annual sales from integrated circuit products,
Cisco may exercise rights to purchase our knowledge-based processors directly
from our manufacturers, subject to payments to us. This provision may discourage
or complicate attempts by some third parties to acquire us.
Our
stockholder rights plan could prevent stockholders from receiving a premium over
the market price for their shares from a potential acquirer.
We adopted a
stockholder rights plan that generally entitles our stockholders to rights to
acquire additional shares of our common stock when a third party acquires 15.0%
of our common stock or commences or announces its intent to commence a tender
offer for at least 15.0% of our common stock, other than for certain
stockholders that were stockholders prior to our initial public offering as to
whom this threshold is 20.0%. This plan could delay, deter or prevent an
investor from acquiring us in a transaction that could otherwise result in
stockholders receiving a premium over the market price for their shares of
common stock.
We
may need to obtain financing in order to fund our growth strategy.
We believe
that we have or will have access to capital sufficient to satisfy our working
capital requirements for at least the next 12 months. However, it may become
necessary for us to raise additional funds to support our growth. We cannot
assure you that we will be able to obtain financing when needed or that, if
available to us, the terms will be acceptable to us. If we issue equity
securities in any financing, the new securities may have rights and preferences
senior to our shares of common stock, and the ownership interest in us of our
current stockholders will be proportionately reduced. If we issued debt
securities, they will rank senior to all equity securities. If we are unable to
raise additional capital, we may not be able to implement our growth strategy,
and our business could be harmed significantly. Our future capital requirements
will depend on many factors, including the amount of revenue we generate, the
timing and extent of spending to support product development efforts, the
expansion of sales and marketing activities, the timing of introductions of new
products, the costs to ensure access to adequate manufacturing capacity, and the
continuing market acceptance of our products, and any future business
acquisitions that we might undertake. However, if we do not meet our plan, we
could be required, or might elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on
terms acceptable to us or at all. We also might decide to raise additional
capital at such times and upon such terms as management considers favorable
and in the interests of the Company. We may sell up to approximately an
additional $120 million of our debt and/or equity securities (before reductions
for expenses, underwriting discounts and commissions) under our existing shelf
registration statement on Form S-3 which may result in an increase in the number
of shares and decline in earnings per share. We may sell these securities from
time-to-time without prior announcement.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following
table provides the names, ages and offices of each of our executive officers as
of January 31, 2010:
|
Title
|
Age
|
Position
|
|||
|
Ronald
Jankov
|
51 |
Director,
Chief Executive Officer and President
|
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|
Behrooz
Abdi
|
48 |
Executive
Vice President and General Manager
|
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|
Michael
Tate
|
44 |
Vice
President and Chief Financial Officer
|
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|
Marcia
Zander
|
46 |
Senior
Vice President of Worldwide Sales
|
|||
|
Varadarajan
Sirnivasan
|
58 |
Vice
President of Product Development and Chief Technical
Officer
|
|||
|
Dimitrios
Dimitrelis
|
52 |
Vice
President of Engineering
|
|||
|
Mozfar
Maghsoudnia
|
43 |
Vice
President of Worldwide Manufacturing
|
|||
|
Ibrahim
Korgav
|
61 |
Senior
Vice President of Worldwide Business Operations
|
|||
|
Chris
O'Reilly
|
36 |
Vice
President of Marketing
|
|||
|
Roland
Cortes
|
44 |
Vice
President, General Counsel and
Secretary
|
|||
Ronald Jankov
has served as our President, Chief Executive Officer and as a member of our
board of directors since April 2000.
Behrooz Abdi
has served as our Executive Vice President and General Manager in charge of our
MPS/CPS business since November 2009. From November 2007 to October 2009, Mr.
Abdi was President and Chief Executive Officer of RMI Corporation. From March
2004 to November 2007, Mr. Abdi was Senior Vice President and General
Manager of Qualcomm CDMA Technologies at Qualcomm, Inc. Prior to
Qualcomm, Mr. Abdi held leadership and engineering positions at Motorola in its
Semiconductor Products Sector, now Freescale Semiconductor, Inc. His
last role at Motorola was Vice President and General Manager for the Radio
Products Division from July 1985 to December 2003.
Michael Tate
has served as our Vice President of Finance and Chief Financial Officer since
July 2007. Prior to joining us, Mr. Tate was interim chief financial
officer, vice president, corporate controller, and treasurer at Marvell
Technology Group Ltd. He joined Marvell in January 2001 as part of
Marvell’s acquisition of Galileo Technology Ltd.
Marcia Zander
has served as our Senior Vice President of Worldwide Sales since January 2006
and Vice President of Sales since July 1999.
Varadarajan
Srinivasan has served as our Vice President of Product Development since
March 1996, as our Chief Technical Officer since August 2000.
Dimitrios
Dimitrelis has served as our Vice President of Engineering since July
2002. From July 1999 to March 2002, Mr. Dimitrelis was Director of
Engineering for Vitesse Semiconductor Corp., a communications integrated circuit
company, where he was primarily responsible for the development of a 10G network
processor.
Mozafar
Maghsoudnia has served as our Vice President of Worldwide Manufacturing
since January 2007, as Vice President of Manufacturing since August 2006, and
Director of Technology since June 2003. From June 1988 to June 2003,
Mr. Maghsoudnia was employed by Analog Devices, Inc., where he was
responsible for wafer fabrication and technology in his last
assignment.
Ibrahim Korgav
has served as our Senior Vice President of Worldwide Business Operations since
January 2007 and as our Senior Vice President of Manufacturing and Business
Operations from March 2002 to January 2007.
Chris O’Reilly
has served as our Vice President of Marketing since August 2007. Prior to August
2007, Mr. O’Reilly served as our senior director of marketing, director of
sales for the Asia Pacific region and senior marketing manager since
1999.
Roland Cortes
has served as our Vice President, General Counsel and Secretary since April
2007. Prior to April 2007, Mr. Cortes served as our Secretary since May
2004, as our Senior Director of Legal Affairs and IP Management since July 2002,
and as our Director of Legal Affairs and IP Management since April
1999.
Not
applicable.
The following
table sets forth the location, and approximate square footage of each of the
principal properties used by us during 2009. All properties are leased under
operating leases which expire at various times through 2015.
|
Location
|
Approximate
Square
Footage
|
|||
|
Mountain
View, California, USA
|
42,000 | |||
|
Cupertino,
California, USA
|
51,597 | |||
|
Austin,
Texas, USA
|
15,630 | |||
|
Banglore,
India
|
20,860 | |||
In addition,
we lease office spaces in Toulouse, France, Beijing, Shanghai, Nanjing, and
Shenzhen, China, Taipei and Hsinchu, Taiwan, Seoul, Korea, Tokyo, Japan, and
Mumbai, India. We believe that these facilities are adequate for our current
needs and that suitable additional or substitute space will be available as
needed to accommodate foreseeable expansion of our operations.
We are not
involved in any legal proceedings that management believes will have a material
adverse effect our business, results of operations, financial position or cash
flows.
On October 23, 2009,
we held an special meeting of our stockholders. The stockholders
approved the
issuance of a maximum of 13,080,000 shares of our common stock as merger
consideration and to new employees in connection with the proposed acquisition
of RMI by the votes set forth below:
|
For
|
Against
|
Abstentions
|
Broker Non-Votes
|
|||
|
19,783,613
|
32,964
|
16,462
|
0
|
PART
II
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information for Common Stock
Our common
stock is traded on the Global Select Market of the NASDAQ Stock Market under the
symbol “NETL”. The following table sets forth, for the periods indicated, the
intra-day high and low per share sale prices of our common stock, as reported on
the Global Select Market.
|
Price
Range Per Share
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
2009
|
||||||||
|
Fourth
quarter
|
$ | 48.00 | $ | 36.87 | ||||
|
Third
quarter
|
$ | 46.80 | $ | 32.36 | ||||
|
Second
quarter
|
$ | 38.50 | $ | 26.77 | ||||
|
First
quarter
|
$ | 28.57 | $ | 19.68 | ||||
|
Fiscal
2008
|
||||||||
|
Fourth
quarter
|
$ | 30.45 | $ | 14.42 | ||||
|
Third
quarter
|
$ | 39.10 | $ | 26.98 | ||||
|
Second
quarter
|
$ | 40.26 | $ | 23.44 | ||||
|
First
quarter
|
$ | 32.90 | $ | 20.15 | ||||
Holders
As of January
31, 2009, there were approximately 152 holders of record (not including
beneficial holders of stock held in street names) of our common
stock.
Dividend
Policy
We have not
declared or paid cash dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future. We expect to retain future
earnings, if any, to fund the development and growth of our business. Our board
of directors will determine future dividends, if any. Under a credit agreement
dated June 19, 2009 with a syndication of banks, we are prohibited from the
declaration and payment of cash dividends.
On February 16,
2010, the Board of Directors approved a two-for-one stock split of our common
stock, to be effected pursuant to the issuance of additional shares as a stock
dividend. The stock dividend is payable on March 19, 2010 to stockholders of
record as of March 5, 2010.
Securities
Authorized for Issuance Under Equity Compensation Plans
See
Item 12 of Part III of this Report regarding information about securities
authorized for issuance under our equity compensation plans.
Performance
Graph
The following
graph shows the 5 years cumulative total stockholder return (change in stock
price plus reinvested dividends) assuming the investment of $100 on December 31,
2004 in each of the Company’s common stock, the S&P 500 Index and the
Philadelphia Semiconductor Index. The comparisons in the table are required by
the SEC and are not intended to forecast or be indicative of possible
future performance of the Company’s common stock.
COMPARISON
OF 5 YEARS CUMULATIVE TOTAL RETURN
Among
NetLogic Microsystems, Inc., the S&P 500 Index
and the
Philadelphia Semiconductor Index
|
Cumulative
Total Returns
|
||||||||||||||||||||||||
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
|||||||||||||||||||
|
NetLogic
Micrsosystems, Inc.
|
$ | 100.00 | $ | 272.40 | $ | 216.90 | $ | 322.00 | $ | 220.10 | $ | 462.60 | ||||||||||||
|
S&P
500 Index
|
$ | 100.00 | $ | 103.00 | $ | 117.03 | $ | 121.16 | $ | 74.53 | $ | 92.01 | ||||||||||||
|
Philadelphia
Semiconductor
Index
|
$ | 100.00 | $ | 110.66 | $ | 107.78 | $ | 94.17 | $ | 48.96 | $ | 83.06 | ||||||||||||
Recent Sales of Unregistered
Securities
On October
30, 2009, we completed the acquisition of RMI and issued a total of 5.0
million shares of common stock to the holders of preferred stock of RMI,
including shares withheld for escrow as security for RMI’s indemnity obligations
and for estimated expenses of escrow. Pursuant to the terms of the
merger agreement for the RMI acquisition we also became obligated for the
contingent issuance of a maximum of approximately 1.6 million
additional shares of common stock subject to the achievement of earn-out
milestones for revenues generated from the products acquired from RMI during a
12-month period following the closing date of the acquisition. No
underwriters were involved in the transaction. We issued and agreed
to issue these shares in a merger exchange transaction exempt from the
registration requirements under section 5 of the Securities Act of 1933 pursuant
to Section 4(2) and Rule 506 under Regulation D.
The following
selected consolidated financial data are qualified by reference to, and should
be read in conjunction with, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Financial Statements and related
Notes included in Item 8 of this report, which discusses factors affecting
the comparability of such financial data.
The selected
balance sheet data as of December 31, 2009 and 2008 and selected statements
of operations data for the years ended December 31, 2009, 2008 and 2007 are
derived from our audited financial statements included elsewhere in this report.
The selected balance sheet data as of December 31, 2007, 2006 and 2005 and
the selected statements of operations data for the years ended December 31,
2006 and 2005 were derived from audited financial statements not included in
this report. Our historical results are not necessarily indicative of our future
results.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 174,689 | $ | 139,927 | $ | 109,033 | $ | 96,806 | $ | 81,759 | ||||||||||
|
Cost
of revenue
|
99,251 | 61,616 | 44,732 | 36,762 | 33,415 | |||||||||||||||
|
Gross
profit
|
75,438 | 78,311 | 64,301 | 60,044 | 48,344 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
73,631 | 51,607 | 45,175 | 36,578 | 21,939 | |||||||||||||||
|
Selling,
general and administrative
|
43,931 | 26,567 | 19,672 | 15,455 | 10,936 | |||||||||||||||
|
Change
in contingent earn-out liability
|
2,008 | - | - | - | - | |||||||||||||||
|
Acquisition-related
costs
|
5,412 | - | - | - | - | |||||||||||||||
|
In-process
research and development
|
- | - | 1,610 | 10,700 | - | |||||||||||||||
|
Total
operating expenses
|
124,982 | 78,174 | 66,457 | 62,733 | 32,875 | |||||||||||||||
|
Income
(loss) from operations
|
(49,544 | ) | 137 | (2,156 | ) | (2,689 | ) | 15,469 | ||||||||||||
|
Interest
income
|
992 | 1,595 | 4,431 | 3,737 | 1,568 | |||||||||||||||
|
Interest
expense
|
(1,666 | ) | (33 | ) | - | (203 | ) | |||||||||||||
|
Other
income and expense, net
|
(4 | ) | (59 | ) | 32 | 3 | (16 | ) | ||||||||||||
|
Income
(loss) before income taxes
|
(50,222 | ) | 1,640 | 2,307 | 1,051 | 16,818 | ||||||||||||||
|
Provision
for (benefit from) income taxes
|
(3,060 | ) | (1,937 | ) | (288 | ) | 459 | 379 | ||||||||||||
|
Net
income (loss)
|
$ | (47,162 | ) | $ | 3,577 | $ | 2,595 | $ | 592 | $ | 16,439 | |||||||||
|
Net
income (loss) per share - basic
|
$ | (2.04 | ) | $ | 0.17 | $ | 0.13 | $ | 0.03 | $ | 0.93 | |||||||||
|
Net
income (loss) per share - diluted
|
$ | (2.04 | ) | $ | 0.16 | $ | 0.12 | $ | 0.03 | $ | 0.87 | |||||||||
|
Shares
used in calculation - basic
|
23,091 | 21,472 | 20,747 | 19,758 | 17,725 | |||||||||||||||
|
Shares
used in calculation - diluted
|
23,091 | 22,314 | 21,938 | 21,107 | 18,992 | |||||||||||||||
|
December
31,
|
||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents and short-term investments
|
$ | 44,278 | $ | 96,541 | $ | 50,689 | $ | 89,879 | $ | 65,788 | ||||||||||
|
Working
capital
|
66,790 | 87,853 | 63,956 | 95,986 | 65,162 | |||||||||||||||
|
Total
assets
|
532,111 | 245,771 | 203,151 | 157,769 | 85,529 | |||||||||||||||
|
Software
licenses and other obligations
|
5,446 | 1,219 | 2,528 | 2,625 | 687 | |||||||||||||||
|
Stockholders'
equity
|
425,955 | 200,267 | 171,888 | 142,524 | 68,656 | |||||||||||||||
The selected
consolidated financial data presents financial information in the relevant
periods for the acquisition of the IDT NSE business in mid-July 2009, the
acquisition of RMI Corp. completed in late October 2009, the acquisition of the
TCAM2 and TCAM-CR network search engine products and certain related assets from
Cypress Semiconductor Corp. in August 2007, the acquisition of Aeluros, Inc.
completed in late October 2007, and the acquisition of NSE Business from Cypress
Semiconductor Corp. completed in February 2006. See Note 2 of Notes to
Consolidated Financial Statements under Item 8 of this Annual Report on
Form 10-K for further discussion of these acquisitions. The coparability of the
data in the table above is affected by our adoption of various new accounting
guidance in the periods presents, specifically, those related to business
combinations, stock compensation and income taxes.
Overview
We are a
leading fabless semiconductor company that designs, develops and sells
proprietary high-performance processors and high speed integrated circuits that
are used to enhance the performance and functionality of advanced 3G/4G mobile
wireless infrastructure, data center, enterprise, metro Ethernet, edge and core
infrastructure networks. Our market-leading product portfolio
includes high-performance multi-core processors, knowledge-based processors,
high-speed 10/40/100 Gigabit Ethernet physical layer devices, network search
engines, and ultra low-power embedded processors. These products are
designed into high-performance systems such as switches, routers, wireless base
stations, radio network controllers, security appliances, networked storage
appliances, service gateways and connected media devices offered by leading
original equipment manufacturers (OEMs) such as AlaxalA Networks Corporation,
Alcatel-Lucent, ARRIS Group, Inc., Brocade Communications
Systems, Inc., Cisco Systems, Inc., Dell Inc., Ericsson, Fortinet,
Inc., Fujitsu Limited, Hangzhou H3C Technologies Co. Ltd, Hitachi, Ltd., Huawei
Technologies Co., Ltd., Huawei Symantec Technologies Co.,Ltd , IBM Corporation,
Juniper Networks, Inc., LG Electronics, Inc., Motorola, Inc., NEC Corporation,
Samsung Electronics, Sun Microsystems, Inc., Tellabs, and ZTE
Corporation.
The products
and technologies we have developed and acquired are targeted to enable our
customers to develop systems that support the increasing speeds and complexity
of the Internet infrastructure. We believe there is a growing need to include
multi-core processors, knowledge-based processors, and high speed physical layer
devices in a larger number of such systems as networks transition to all
Internet Protocol (IP) packet processing at increasing speeds and
complexity.
The equipment
and systems that use our products are technically complex. As a result, the time
from our initial customer engagement design activity to volume production can be
lengthy and may require considerable support from our design engineering,
research and development, sales, and marketing personnel in order to secure the
engagement and commence product sales to the customer. Once the customer’s
equipment is in volume production, however, it generally has a life cycle of
three to five years and requires less ongoing support.
We derive
revenue primarily from sales of semiconductor products to OEMs, their contract
manufacturers and distributors. Usually, we sell the initial shipments of a
product for a new design engagement directly to the OEM customer. Once the
design enters volume production, the OEM frequently outsources its manufacturing
to contract manufacturers who purchase the products directly from
us.
We also use
distributors to provide valuable assistance to end-users in delivery of our
products and related services. In accordance with standard market practice, our
distributor agreements limit the distributor’s ability to return product up to a
portion of purchases in the preceding quarter and limit price protection for
inventory on-hand if it subsequently lowers prices on our
products. We recognize sales through distributors at the time of
shipment to end customers.
As a fabless
semiconductor company, our business is less capital intensive than others
because we rely on third parties to manufacture, assemble, and test our
products. In general, we do not anticipate making significant capital
expenditures aside from business acquisitions that we might make from time to
time. In the future, as we launch new products or expand our operations,
however, we may require additional funds to procure product mask sets, order
elevated quantities of wafers from our foundry partners, perform qualification
testing and assemble and test those products.
Because we
purchase all wafers from suppliers with fabrication facilities and outsource the
assembly and testing to third party vendors, a significant portion of our costs
of revenue consists of payments to third party vendors.
Recent
Acquisitions
On
October 30, 2009, we completed the acquisition of RMI, a provider of
high-performance and low-power multi-core, multi-threaded processors. Pursuant
to the Agreement and Plan of Merger Reorganization by and among us, Roadster
Merger Corporation, RMI Corporation and WP VIII Representative LLC dated as of
May 31, 2009, or the merger agreement, on October 30, 2009, Roadster
Merger Corporation was merged with and into RMI, and we delivered merger
consideration of approximately 5.0 million shares of our common stock and
$12.6 million cash to the paying agent for distribution to the holders of RMI
capital stock. Approximately 10% of the shares of our common stock are being
held in escrow as security for claims and expenses that might arise during the
first 12 months following the closing date. The closing price of a share of our
common stock on October 30, 2009 was $38.01.
We may be
required to issue and deliver up to an additional 1.6 million shares of
common stock and pay an additional $15.9 million cash to the former holders of
RMI capital stock as earn-out consideration based upon achieving specified
percentages of revenue targets for either the 12-month period from
October 1, 2009 through September 30, 2010, or the 12-month period
from November 1, 2009 through October 31, 2010, whichever period
results in the higher percentage of the revenue target. The additional earn-out
consideration, if any, net of applicable indemnity claims, will be paid on or
before December 31, 2010.
On
July 17, 2009, we completed the IDT NSE acquisition. The acquisition was
accounted for as a business combination during the third quarter of fiscal 2009.
As purchase consideration we paid $98.2 million in cash, net of a price
adjustment based on a determination of the actual amount of inventory
received.
On
October 24, 2007, we completed the merger and acquisition of Aeluros, Inc.
which we refer to as the “Aeluros Acquisition”. The acquisition was accounted
for as a business combination during the fourth quarter of fiscal 2007. We paid
$57.1 million in cash upon the closing of the transaction in exchange for all of
the outstanding equity securities of Aeluros. We reserved 104,000 shares of
common stock for future issuance upon the exercise of unvested employee stock
options of Aeluros that we assumed and are subject to continued employment
vesting requirements. In addition, under the terms of the definitive agreement,
we paid $15.5 million cash in February 2009 based on the attainment of revenue
performance milestones for the acquired business during the one year period
following the close of the transaction.
Our results
of operations for 2009 reflect two months of revenues subsequent to the RMI
acquisition and five and one-half months of revenue subsequent to the IDT NSE
acquisition. Revenues in the second half of 2009, included $16.3
million attributable to the IDT NSE acquisition and $14.5 million of revenue
attributable to the RMI acquisition. The last quarter of 2009 also
included operating costs associated with an additional 269 employees from the
RMI acquisition. Results of operations in 2010 will reflect a full
year of revenues and costs attributable to both acquisitions and consequently
will be substantially higher than comparable period results in
2009.
Outlook
and Challenges
Our
year-over-year revenue increased from $139.9 million for the year ended December
31, 2008 to $174.7 million for the year ended December 31, 2009. In
early 2009, in light of a volatile macro-economic environment and a decrease in
demand, we focused on operating efficiencies and containing our cash operating
expense growth During the second half of 2009 we experienced an
increase in sequential quarterly revenue growth. Our quarterly
revenues grew from $32.5 million in the second quarter of 2009 to $42.3 million
in the third quarter of 2009 to $69.5 million in the fourth quarter of
2009. The sequential increase in our quarterly revenues was due to a
combination of an improvement in the macroeconomic environment as well as
increased demand for our products as result of new customer programs being
introduced into the market utilizing our products and new revenues from our
acquisitions. Given the resumption of our revenue growth, for 2010 we
have shifted from focusing on containing our cash operating expenses to
strategically investing in our product development and scaling our business
operations to support our growth as well as the continued succesful integration
of the IDT NSE business and RMI. Our continued integration efforts
include, the assimilation of employees; retaining key personnel; process and
system rationalization related to our management information and enterprise
resource planning systems to keep in pace with our breadth and scale of
business, while maintaining regulatory compliance; and keeping existing
customers and obtaining new customers.
For the years
ended December 31, 2009, 2008, and 2007, our top five customers in terms of
revenue accounted for approximately 68%, 68%, and 79% of total product revenue,
respectively. Although we believe our revenues will continue to be concentrated
with our significant customers, we expect continued favorable market trends,
such as the increasing number of 10 Gigabit ports as enterprises and datacenters
upgrade their legacy networks to better accommodate the proliferation of video
and virtualization applications, and the growing mobile wireless infrastructure
and IPTV markets, will enable us to broaden our customer base.
Additionally, our expanding product portfolio will also help us further
diversify our customer and product revenues as well as expanding our product
portfolio with our existing customers.
Cisco
Business
Cisco and its
contract manufacturers have accounted for a large percentage of our historical
revenue. At Cisco’s request, in 2007, we transitioned into a just-in-time
inventory arrangement covering substantially all of our product shipments to
Cisco and its contract manufacturers. Pursuant to this arrangement we deliver
products to Wintec Industries (“Wintec”) based on orders they place with us, but
we do not recognize product revenue unless and until Wintec reports that it has
delivered the product to Cisco or its contract manufacturer to incorporate into
its end products. Given this arrangement, unless Cisco or its contract
manufacturers take possession of our products from Wintec in accordance with the
schedules provided to us, our predicted future revenue stream could vary
substantially from our forecasts, and our results of operations could be
materially and adversely affected. Additionally, because we own the inventory
physically located at Wintec until it is shipped to Cisco and its contract
manufacturers, our ability to effectively manage inventory levels may be
impaired, causing our total inventory levels to increase. This, in turn,
could increase our expenses associated with excess and obsolete product and
negatively impact our cash flows. For the years ended December 31, 2009, 2008
and 2007, our revenues from Cisco and Cisco’s contract manufactures were $61.7
million, $52.7 million and $55.1 million or approximately 35%, 38%, and 50% of
total revenue.
Critical Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the U.S. requires management to make
fair and reasonable estimates and assumptions that affect reported amounts of
assets, liabilities and operating expenses during the period reported. The
following accounting policies require management to make estimates and
assumptions. These estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period they are determined to be
necessary. If actual results differ significantly from management’s estimates,
our financial statements could be materially impacted. Our estimates are guided
by observing the following critical accounting policies.
Revenue
Recognition. We derive our revenue primarily from sales of semiconductor
products. We recognize revenue when all of the following criteria have been met:
(i) persuasive evidence of a binding arrangement exists, (ii) delivery
has occurred, (iii) the price is deemed fixed or determinable and free of
contingencies and significant uncertainties, and (iv) collection is
probable. The price is considered fixed or determinable at the execution of an
agreement, based on specific products and quantities to be delivered at
specified prices, which is often memorialized with a customer purchase order. We
assess the ability to collect from our customers based on a number of factors,
including credit worthiness and any past transaction history of the
customer.
Shipping
charges billed to customers are included in product revenue and the related
shipping costs are included in cost of revenue. We recognize revenue at the time
of shipment to OEM customers, their contract manufacturers and our international
sales representatives. Revenue consists primarily of sales of the Company’s
products to OEMs, their contract manufacturers or distributors. Initial sales of
the Company’s products for a new design are usually made directly to OEMs as
they design and develop their product. Once their design enters production, they
often outsource their manufacturing to contract manufacturers that purchase the
Company’s products directly from the Company or from the Company’s
distributors
Product
revenue and costs relating to sales made through distributors with rights of
return and price credits are deferred until the distributors sell the product to
end customers because the selling price is not fixed and determinable and we are
not able to estimate future returns. Revenue recognition depends on notification
from the distributor that product has been sold to an end
customers. On each reporting date the Company records a reduction in
accounts receivable and deferred revenue based on the Company's estimate of the
margin to be ultimately recognized upon sale of the product to an end
customer
We entered
into a purchase agreement with Wintec who has become the primary purchaser of
our products on a consignment basis for resale to Cisco and its contract
manufacturers. We generally recognize revenue when Wintec ships our product to
Cisco or its contract manufacturers.
Inventory Valuation
and Adverse Purchase Commitments. We value our inventories at the
lower of cost or market. We record inventory reserves for estimated obsolescence
or unmarketable inventories based upon assumptions about future demand and
market conditions. These estimates are generally based on a 12-month forecast
prepared by management. Once a reserve is established, it is maintained until
the product to which it relates is sold or otherwise disposed of. If actual
market conditions are less favorable than those expected by management,
additional adjustment to inventory valuation may be required. The carrying value
of inventory and the determination of possible adverse purchase commitments are
dependent on our estimate of the yield that will be achieved, or the percent of
good products identified when the product is tested.
Warranty
Accrual. Our products are subject to warranty for a period ranging
from one to five years from the date of sale and we provide for the estimated
future costs of replacement upon shipment of the product in the accompanying
statements of operations. We estimate our warranty accrual based on historical
claims compared to historical revenue and assume that we will have to replace
products subject to a claim.
Allowance for
Doubtful Accounts. In order to determine the collectability of our
accounts receivable, we continually assess factors such as previous customer
transactions and the credit-worthiness of the customer. To date, our accounts
receivable write-offs have been immaterial. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of certain customers
to make required payments. In general, we establish such allowances for
accounts aged over 90 days from the invoice date, unless specific circumstances
indicate that the balance is collectible.
Accounting for Income
Taxes. We account for income taxes under the provisions of Accounting
Standards Codification (ASC) 740, Income Taxes. In applying ASC740, we are
required to estimate our current tax exposure together with assessing temporary
differences resulting from differing treatments of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities.
Significant management judgment is required to assess the likelihood that our
deferred tax assets will be recovered from future taxable income. During the
third fiscal quarter of 2007, we reassessed the valuation allowance
previously recorded against our net deferred tax assets which consisted
primarily of net operating loss carryforwards and research and development tax
credits. Based on our earnings history and projected future taxable income,
management determined that it was more likely than not that the deferred tax
assets would be realized.
In the first
quarter of fiscal 2007, we adopted ASC 740-10 Income Taxes. As a result,
we recognize liabilities for uncertain tax positions based on the two-step
process prescribed in the interpretation. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step requires us to estimate and measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon ultimate
settlement. It is inherently difficult and subjective to estimate such amounts,
as we have to determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis. This evaluation
is based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, effectively settled issues under audit, and
new audit activity. Such a change in recognition or measurement would result in
the recognition of a tax benefit or an additional charge to the tax provision.
Refer to Note 7—Income Taxes, of the “ Notes to Consolidated Financial
Statements ” in Item 8 for further
information.
Long-lived Assets and
Intangible Assets. We assess the impairment of long-lived assets and
intangible assets whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Whenever events or
changes in circumstances suggest that the carrying amount of long-lived assets
may not be recoverable, we estimate the future cash flows expected to be
generated by the asset from its use or eventual disposition. If the sum of the
expected future cash flows, which includes revenue, is less than the carrying
amount of those assets, we recognize an impairment loss based on the excess of
the carrying amount over the fair value of the assets. Significant management
judgment is required in the forecasts of future operating results that are used
in the discounted cash flow method of valuation.
Goodwill. We
evaluate goodwill for impairment at least on an annual basis or whenever events
and changes in circumstances suggest that the carrying amount may not be
recoverable from its estimated future cash flow. We perform goodwill impairment
test for our single and sole reporting unit. If the fair value of the
reporting unit exceeds the carrying value of the reporting unit, goodwill is not
impaired. We perform the goodwill impairment assessment at the Company level,
which is the sole reporting unit. We performed our annual goodwill impairment
test in the fourth quarter and concluded there was no impairment of goodwill
during the years ended December 31, 2009, 2008 and 2007.
Stock-based
Compensation. We estimate the fair value of stock options using the
Black-Scholes-Merton valuation model (the “Black-Scholes Model”), consistent
with the provisions of ASC 718 Compensation – Stock Compensation. The
Black-Scholes Model requires the input of highly subjective assumptions,
including the option’s expected life, the price volatility of the underlying
stock and future forfeitures and related tax effects. The expected stock price
volatility assumption was determined using a combination of the historical and
implied volatility of the Company’s common stock. Changes in the subjective
assumptions required in the valuation models may significantly affect the
estimated value of the awards, the related stock-based compensation expense and,
consequently, our results of operations.
Results
of Operations
Comparison
of Year Ended December 31, 2009 to Year Ended December 31,
2008
Revenue,
cost of revenue and gross profit
The table
below sets forth the fluctuations in revenue, cost of revenue and gross profit
data for the years ended December 31, 2009 and 2008 (in thousands, except
percentage data):
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Revenue
|
$ | 174,689 | 100.0 | % | $ | 139,927 | 100.0 | % | $ | 34,762 | 24.8 | % | ||||||||||||
|
Cost
of revenue
|
99,251 | 56.8 | % | 61,616 | 44.0 | % | 37,635 | 61.1 | % | |||||||||||||||
|
Gross
profit
|
$ | 75,438 | 43.2 | % | $ | 78,311 | 56.0 | % | $ | (2,873 | ) | -3.7 | % | |||||||||||
Revenue.
Revenue for the year ended December 31, 2009 increased by $34.8 million
compared with that of the year ended December 31, 2008. Revenue from sales
to Wintec, Cisco and Cisco’s contract manufacturers (collectively “Cisco”)
represented $61.7 million of our total revenue for the year ended
December 31, 2009, compared to $52.7 million during the year ended
December 31, 2008. The increase in sales to Cisco was primarily due to an
increase of $8.5 million in revenue from products from our IDT NSE acquisition,
$1.1 million from products from our RMI acquisition, and $9.0 million in revenue
from sales of our new products to Cisco, including the NL7000 and
NL8000. The increase was partially offset by a decrease of $10.4
million in sales of our NL5000 and network search engine
products. Revenue from non-Cisco customers represented $113.0 million
of total revenue for the year ended December 31, 2009 compared with $87.2
million during the year end December 31, 2008. The increase in sales
to non-Cisco customers was primarily due to an increase of $7.8 million in
revenue from products we acquired in the IDT NSE acquisition, $13.3
million from products we acquired in the RMI acquisition, and $16.2 million in
revenue from sales of our new products, including the NL7000 and
NL9000. This increase was partially offset by a decrease of $13.3
million in sales of our NL5000, network search engine products and physical
layer products. During the year ended December 31, 2009 and 2008, Alcatel-Lucent
accounted for 13% of our total revenue compared with 12% in 2008, and Huawei
accounted for 10% of our total revenue and was below 10% in 2008.
Cost of Revenue/Gross
Profit/Gross Margin. Cost of revenue for the year ended December 31,
2009 increased by $37.6 million compared with that of the year ended December
31, 2008. Cost of revenue increased primarily due to the increase in
product sales, amortization of intangible assets, and fair value adjustments
related to acquired inventory. The increases in amortization of
intangible assets and fair value adjustments related to acquired inventory were
attributable to the IDT NSE and RMI acquisitions. Cost of revenue for
the years ended December 31, 2009 and 2008, respectively, included $18.9 million
and $11.9 million of amortization of intangible assets expense, $1.9 million and
$2.4 million of a provision for excess and obsolete inventory, and $20.4 million
and $1.5 million of a fair value adjustment related to acquired inventory.
Gross margin
for the year ended December 31, 2009 decreased by 12.8% compared with 2008,
primarily due to increases in amortization of intangible assets and fair
value adjustments related to acquired inventory.
Operating
expenses
The table
below sets forth operating expense data for the years ended December 31,
2009 and 2008 (in thousands, except percentage data):
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
$ | 73,631 | 42.1 | % | $ | 51,607 | 36.9 | % | $ | 22,024 | 42.7 | % | ||||||||||||
|
Selling,
general and administrative
|
43,931 | 25.1 | % | 26,567 | 19.0 | % | 17,364 | 65.4 | % | |||||||||||||||
|
Change
in contingent earn-out liability
|
2,008 | 1.1 | % | - | - | 2,008 | - | |||||||||||||||||
|
Acquisition-related
costs
|
5,412 | 3.1 | % | - | - | 5,412 | - | |||||||||||||||||
|
Total
operating expenses
|
$ | 124,982 | 71.5 | % | $ | 78,174 | 55.9 | % | $ | 46,808 | 59.9 | % | ||||||||||||
Research and
Development Expenses. Research and development expenses increased during
the year ended December 31, 2009, as compared to fiscal 2008, primarily due
to increases in payroll and payroll related expenses of $6.3 million,
stock-based compensation expenses of $12.1 million, product development and
qualification expenses of $2.8 million, and software licenses expenses of $2.1
million. The increases were partially offset by decreases in
consulting and outside vendor expenses of $1.6 million. The increase in
payroll and payroll related expenses and stock-based compensation expenses were
primarily due to increases in engineering headcount to support our new product
development efforts, and as a result of the RMI acquisition. The increase in
product development and qualification expense was primarily due to the
production qualification and characterization of our processors. Product
development and qualification expenses vary from period to period depending on
the timing of development and tape-out of various products. The
increase in software licenses expenses was primarily due to amortization of
software licenses used for our internal research and development
projects. The remainder of the increase in research and development
expenses was caused by individually minor items. We expect
that research and development expenses will increase in dollar amount and may
increase as a percentage of revenues in 2010 and future periods because we
expect to continue to invest in hiring and training the necessary
employees and building systems infrastructures required to support the
development of new products, and improve existing products.
Selling, General and
Administrative Expenses. Selling, general and administrative expenses
increased during the year ended December 31, 2009, as compared with fiscal
2008, primarily due to increases in payroll and payroll related expenses of $4.5
million, stock-based compensation expenses of $12.6 million, legal expenses of
$0.7 million. The increases were offset partially by decreases in commission
expense of $0.3 million, consulting and outside vendor services expenses of $0.4
million, and other professional services expenses of $0.1
million. The increase in payroll and payroll related expenses and
stock-based compensation expenses resulted primarily from increases in headcount
to support our growing operations in the sales and marketing areas, and as a
result of the RMI acquisition. Selling, general and administrative
expenses also included $1.8 million of amortization expense for the customer
contracts and relationships, tradenames and trademarks, and non-competition
agreements intangible assets for the year ended December 31, 2009. The remainder
of the fluctuation in selling, general and administrative expenses was caused by
individually minor items We expect that selling, general and
administrative expenses will increase in dollar amount and may increase as a
percentage of revenues in 2010 and future periods because we expect to continue
to invest in hiring and training additional employees and making other
additional investments required to support our growing operations in the sales
and marketing areas due our expanded product portfolio as result of our
acquisitions.
Change in contingent
earn-out liability. The change in contingent earn-out liability was $2.0
million for the year ended December 31, 2009. The change in the
estimated fair value of the contingent earn-out liability to be paid out to the
former holders of RMI capital stock was due to an increase in the market price
of our common stock.
Acquisition-Related
Costs. Acquisition-related costs were $5.4 million for the year ended
December 31, 2009 primarily due to legal expenses of $3.1 million,
severance expenses of $0.9 million, consulting and outside vendor services of
$0.7 million, and other professional service of $0.5 million, related to the IDT
NSE and RMI acquisitions. We expect that acqusition-related costs
will decrease in dollar amount and may decrease as a percentage of revenues in
2010.
Other
items
The tables
below set forth other items for the years ended December 31, 2009
and 2008 (in thousands, except percentage data):
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
income
|
$ | 992 | 0.6 | % | $ | 1,595 | 1.1 | % | $ | (603 | ) | -37.8 | % | |||||||||||
Interest
Income. Interest income decreased during the year ended
December 31, 2009, as compared with fiscal 2008, primarily due to decreased
interest income on cash and cash equivalents, and short-term investment balances
as a result of lower yields on our investments and lower invested balances due
to the financing of IDT NSE and RMI acquisitions.
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
expense
|
$ | (1,666 | ) | -1.0 | % | $ | (33 | ) | 0.0 | % | $ | (1,633 | ) | 4948.5 | % | |||||||||
Interest
Expense. Interest expense increased during the year ended
December 31, 2009, as compared with fiscal 2008, primarily due to increased
interest expense of $1.5 million incurred on the line of credit and term notes
which were obtained to finance a portion of the IDT NSE and RMI
acquisitions.
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Other
income and expense, net
|
$ | (4 | ) | 0.0 | % | $ | (59 | ) | 0.0 | % | $ | 55 | -93.2 | % | ||||||||||
Other Income and
Expense, net. Other income and expense, net increased during
the year ended December 31, 2009, as compared with fiscal 2008, primarily
due to a decrease in software license write-offs incurred in 2008.
|
Year
ended
December
31,
2009
|
Percentage
of
Pre-Tax
Income
|
Year
ended
December
31,
2008
|
Percentage
of
Pre-Tax
Income
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Benefit
from income taxes
|
$ | (3,060 | ) | 6.1 | % | $ | (1,937 | ) | -118.1 | % | $ | (1,123 | ) | 58.0 | % | |||||||||
Benefit from income
taxes. During the
year ended December 31, 2009, we recorded an income tax benefit of
$3.1 million. Our effective tax rate of 6.1% for the year ended December
31, 2009 was primarily driven by a rate differential for book income
generated in foreign jurisdictions, the tax impact of non-deductible expenses
such as stock-based compensation expenses and acquisition related expenses and
adjustments to certain tax
reserves relating to an intercompany license agreement.
Stock-Based
Compensation Expense
On
January 1, 2006, we adopted ASC 718, on the modified prospective
application method, which requires the measurement and recognition of
compensation expense for all share-based awards made to our employees and
directors including employee stock options and employee stock purchases
outstanding as of and awarded after January 1, 2006. The total stock-based
compensation expense recognized for the years ended December 31, 2009, 2008
and 2007 was as follows (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
of revenue
|
$ | 672 | $ | 1,030 | $ | 747 | ||||||
|
Research
and development
|
21,527 | 9,474 | 9,933 | |||||||||
|
Selling,
general and administrative
|
18,556 | 5,988 | 5,366 | |||||||||
|
Total
stock-based compensation expense
|
$ | 40,755 | $ | 16,492 | $ | 16,046 | ||||||
In addition,
we capitalized approximately $0.1 million and $0.2 million of stock-based
compensation in inventory as of December 31, 2009 and 2008 which
represented indirect manufacturing costs related to our inventory.
Results
of Operations
Comparison
of Year Ended December 31, 2008 to Year Ended December 31,
2007
Revenue,
cost of revenue and gross profit
The table
below sets forth the fluctuations in revenue, cost of revenue and gross profit
data for the years ended December 31, 2008 and 2007 (in thousands, except
percentage data):
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Revenue
|
$ | 139,927 | 100.0 | % | $ | 109,033 | 100.0 | % | $ | 30,894 | 28.3 | % | ||||||||||||
|
Cost
of revenue
|
61,616 | 44.0 | % | 44,732 | 41.0 | % | 16,884 | 37.7 | % | |||||||||||||||
|
Gross
profit
|
$ | 78,311 | 56.0 | % | $ | 64,301 | 59.0 | % | $ | 14,010 | 21.8 | % | ||||||||||||
Revenue.
Revenue for the year ended December 31, 2008 increased by $30.9 million
compared with that of the year ended December 31, 2007. Revenue from sales
to Wintec, Cisco and Cisco’s contract manufacturers (collectively “Cisco”)
represented $52.7 million of our total revenue for the year ended
December 31, 2008, compared to $55.1 million during the year ended
December 31, 2007. The decrease in sales to Cisco was primarily due to a
decrease of $22.4 million from 2007 in revenue from sales of NL5000 products,
although this decline was largely offset by increased revenue of our new
and additional products for Cisco, including NL7000, NL8000, and TCAM2 products
which increased $20.7 million. Revenue from non-Cisco customers
represented $87.2 million of total revenue for the year ended December 31, 2008
compared with $53.9 million during the year end December 31,
2007. The increase in sales to non-Cisco customers was driven
primarily by increased demand for our products in several emerging new markets,
such as 10 Gigabit Ethernet, which we address with the PLPs that we
acquired in the Aeluros acquisition, and IPTV. During the year ended December
31, 2008, Alcatel-Lucent accounted for 12% of our total revenue compared with
11% in 2007.
Cost of Revenue/Gross
Profit/Gross Margin. Cost of revenue for the year ended December 31,
2008 increased by $16.9 million compared with that of the year ended December
31, 2007. Cost of revenue increased primarily due to the increase in
product sales. Cost of revenue in 2008 also included amortization of
intangible assets, and a provision for excess and obsolete inventory and product
scrap charges. Cost of revenue for the years ended December 31, 2008 and
2007, respectively, included $11.9 million and $5.0 million of amortization of
intangible assets expense, and $2.4 million and $1.0 million of a provision for
excess and obsolete inventory.
Operating
expenses
The table
below sets forth operating expense data for the years ended December 31,
2008 and 2007 (in thousands, except percentage data):
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
$ | 51,607 | 36.9 | % | $ | 45,175 | 41.4 | % | $ | 6,432 | 14.2 | % | ||||||||||||
|
In-process
research and development
|
- | 0.0 | % | 1,610 | 1.5 | % | (1,610 | ) | -100.0 | % | ||||||||||||||
|
Selling,
general and administrative
|
26,567 | 19.0 | % | 19,672 | 18.0 | % | 6,895 | 35.0 | % | |||||||||||||||
|
Total
operating expenses
|
$ | 78,174 | 55.9 | % | $ | 66,457 | 60.9 | % | $ | 11,717 | 17.6 | % | ||||||||||||
Research and
Development Expenses. Research and development expenses increased during
the year ended December 31, 2008, as compared to fiscal 2007, primarily due
to increases in payroll related expenses of $3.8 million, product development
and qualification expenses of $2.1 million, and consulting and outside vendor
expenses of $1.0 million, which were partially offset by a decrease of
stock-based compensation expense of $0.5 million. The increase in payroll
related expenses resulted primarily from increases in engineering headcount in
India to support our new product development efforts, and in the U.S. as a
result of the Aeluros Acquisition. The increase in product development and
qualification expense was primarily due to the production qualification and
characterization of our newly introduced knowledge-based processors. The
remainder of the increase in research and development expenses was caused by
individually minor items.
In-Process Research
and Development. During
the year ended December 31, 2007, we recorded $1.6 million of in-process
research and development charge related to the Aeluros Acquisition at the close
of the acquisition.
Selling, General and
Administrative Expenses. Selling, general and administrative expenses
increased during the year ended December 31, 2008, as compared with fiscal
2007, primarily due to increased commission expenses of $1.7 million, payroll
related expenses of $1.7 million, amortization expense of intangible assets –
customer relationships of $1.1 million, consulting and outside vendor expense of
$1.0 million, other professional services fess of $0.4 million, stock-based
compensation expense of $0.6 million, and travel expense of $0.1 million. The
increase in commission expenses was primarily a result of our increase in
revenue. The increase in payroll related expenses and stock-based compensation
expense resulted primarily from increased headcount to support our growing
operations in the sales and marketing areas. The remainder of the fluctuation in
selling, general and administrative expenses was caused by individually minor
items.
Other
items
The tables
below set forth other items for the years ended December 31, 2008
and 2007 (in thousands, except percentage data):
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
income
|
$ | 1,595 | 1.1 | % | $ | 4,431 | 4.1 | % | $ | (2,836 | ) | -64.0 | % | |||||||||||
Interest
Income. Interest income decreased during the year ended
December 31, 2008, as compared with fiscal 2007, primarily due to decreased
interest income on cash and cash equivalents, and short-term investment balances
as a result of lower yields on our investments and lower invested balances after
paying approximately $71.7 million in connection with the acquisitions of the
TCAM2 Products from Cypress and the Aeluros Acquisition.
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
expense
|
$ | (33 | ) | 0.0 | % | $ | - | - | $ | (33 | ) | -100.0 | % | |||||||||||
Interest
Expense. Interest expense increased during the year ended
December 31, 2008, as compared with fiscal 2007, primarily due to increased
interest expense incurred on our software licenses.
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Other
income and expense, net
|
$ | (59 | ) | 0.0 | % | $ | 32 | 0.0 | % | $ | (91 | ) | -284.4 | % | ||||||||||
Other Income and
Expense, net. Other income and expense, net decreased during
the year ended December 31, 2008, as compared with fiscal 2007, primarily
due to software license write-offs incurred in 2008.
|
Year
ended
December
31,
2008
|
Percentage
of
Pre-Tax
Income
|
Year
ended
December
31,
2007
|
Percentage
of
Pre-Tax
Income
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Provision
for (benefit from) income taxes
|
$ | (1,937 | ) | -1.4 | % | $ | (288 | ) | -0.3 | % | $ | (1,649 | ) | 572.6 | % | |||||||||
Provision for income
taxes. During the
year ended December 31, 2008, we recorded an income tax benefit of
$1.9 million. Our effective tax rate of 35% for the year ended December 31,
2008 was primarily driven by a rate differential for book income generated
in foreign jurisdictions and the tax impact of non-deductible stock
options.
Liquidity
and Capital Resources
Financial
Condition
Our principal
sources of liquidity are our cash and cash equivalents and our available senior
secured revolving credit facility of $25 million with a group of banks executed
in June 2009. As of December 31, 2009 our cash balance was $44.3 million. As of
December 31, 2009 there were no amounts outstanding related to our senior
secured term notes and our senior secured credit facility.
Our cash and
cash equivalents are invested with financial institutions in deposits that, at
times, may exceed federally insured limits. To date, we have not experienced any
losses on our deposits of cash and cash equivalents. However, we believe
that the capital and credit markets have been experiencing unprecedented levels
of volatility and disruption and that recent U.S. sub-prime mortgage defaults
have had a significant impact across various sectors of the financial markets,
causing global credit and liquidity issues. We can provide no assurance that our
cash and cash equivalents will not be adversely affected by these matters in the
future.
Under our
revolving senior secured credit facility, we are required to satisfy certain
financial ratio and other covenants, as described in Note 14 of the Notes to our
Consolidated Financial Statements. We were in compliance with the debt
covenants under the credit agreements applicable to this facility as of
December 31, 2009.
The table
below (in thousands) sets forth the key components of cash flow for the years
ended December 31, 2009, 2008 and 2007:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 48,251 | $ | 41,856 | $ | 24,907 | ||||||
|
Net
cash used in investing activities
|
$ | (128,019 | ) | $ | (14,252 | ) | $ | (32,629 | ) | |||
|
Net
cash provided by financing activities
|
$ | 40,572 | $ | 5,226 | $ | 7,674 | ||||||
Cash
Flows during the Year ended December 31, 2009
Net cash
provided by operating activities was $48.3 million for the year ended
December 31, 2009, which primarily consisted of $47.2 million of net loss,
$62.4 million of non-cash operating expenses and $33.1 million in benefits from
changes in operating assets and liabilities. Non-cash operating
expenses for the year ended December 31, 2009, included depreciation and
amortization of $25.4 million, write-off of debt issuance costs related to
senior secured term notes of $0.5 million, stock-based compensation of $40.7
million, provision for inventory reserve of $1.9 million, offset by
deferred income taxes, net of $4.6 million, and tax benefit from stock-based
awards of $1.5 million. Changes in operating assets and liabilities were
primarily driven by increases in accounts receivables of $7.5 million, prepaid
expenses and other assets of $1.1 millions, accounts payable and accrued
liabilities of $20.1 million, contingent earn-out liability of $2.0 million, and
deferred margin of $1.6 million, offset by a decrease in inventories of
$17.9 million.
Net cash used
in investing activities was $128.0 million during the year ended
December 31, 2009, of which we used $107.4 million in cash paid in
connection with the IDT NSE and RMI acquisitions, $15.0 million for the loan to
RMI, $0.4 million for the purchase of non-competition agreements in connection
with the RMI acquisition, $15.5 million for the payment of Aeluros
post-acquisition revenue milestone, $14.6 million for the purchase of short-term
investments, $1.5 million of the purchase of long-term investment and $1.2
million to purchase property and equipment. Cash used in investing
activities was offset by $27.7 million of sales and maturities of short-term
investments. We expect to make capital expenditures of approximately $6.8
million during fiscal 2010. These capital expenditures will be used primarily to
support product development activities. We will use our cash and cash
equivalents to fund these purchases.
Net cash
provided by financing activities was $40.6 million for the year ended
December 31, 2009, primarily from proceeds from our credit facility
totaling $48.0 million, proceeds from the issuance of common stock in connection
with a registered shelf offering, net of issuance costs, of $29.7 million,
proceeds of $17.2 million from the issuance of common stock under our stock
compensation plans, and tax benefit from stock-based awards of $1.5 million.
Cash was used for financing activities for repayment of the entire $48.0
million of outstanding debt under our credit facility, payment of debt issuance
costs of $1.2 million, tax payments related to vested restricted stock awards
and common stock of $4.3 million, and repayment of software license and other
obligations of $2.3 million.
Cash
Flows during the Year ended December 31, 2008
Net cash
provided by operating activities was $41.9 million for the year ended
December 31, 2008, which primarily consisted of $3.6 million of net income,
$31.7 million of non-cash operating expenses and $6.6 million in changes in
operating assets and liabilities. Non-cash operating
expenses for the year ended December 31, 2008, included depreciation
and amortization of $17.2 million, stock-based compensation of $16.5 million,
and provision for inventory reserve of $2.4 million, offset by deferred
income taxes, net of $3.9 million, and tax benefit from stock-based awards of
$0.7 million. Changes in operating assets and liabilities were primarily driven
by an increase in deferred margin of $1.3 million, inventory of
$1.4 million, other liabilities of $1.1 million and accounts payable of
$0.5 million on higher product sales, offset by a decrease in accounts
receivables of $6.6 million, accrued liabilities of $2.1 million, which
includes the $15.5 million Aeluros post-acquisition revenue milestone, and
prepaid expenses and other assets of $0.6 million.
Net cash used
in investing activities was $14.3 million during the year ended
December 31, 2008, of which we used $13.0 million for the purchase of
short-term investments, and $1.4 million to purchase computer equipment and
research and development design tools to support our growing
operations
Net cash
provided by financing activities was $5.2 million for the year ended
December 31, 2008, primarily from proceeds of stock option exercises of
$7.9 million, and tax benefit from stock-based awards of $0.7 million. Cash
provided by financing activities was offset by repayment of software license and
other obligations of $3.4 million.
Cash
Flows during the Year ended December 31, 2007
During the
year ended December 31, 2007, our operating activities generated net cash
of $24.9 million. During the period, we recorded non-cash items of $22.5 million
primarily consisting of stock-based compensation of $16.0 million, depreciation
and amortization of $9.1 million, in-process research and development charge of
$1.6 million related to the Aeluros Acquisition, provision for inventory reserve
of $1.0 million, offset by net impact of deferred tax asset valuation
allowance release of $0.5 million, tax benefit from stock-based awards of $2.5
million, deferred income taxes, net of $1.7 million, and accretion of discount
on debt securities of $0.7 million. We also generated cash from a decrease of
inventory of $1.5 million, and an increase in accounts payable and accrued
liabilities of $2.9 million, and other long-term liabilities of $1.0 million.
The cash generated was partially offset by the increase in accounts receivable
of $4.5 million on higher sales of our products during the period, increase
in prepaid expenses and other assets of $1.3 million.
Our investing
activities used cash of $32.6 million during the year ended
December 31, 2007, of which we obtained $53.8 million in proceeds from
sales and maturities of short-term investments, and used $13.9 million for the
purchase of short-term investments. We used $2.2 million to purchase computer
equipment and research and development design tools to support our growing
operations. We used $70.2 million to purchase the TCAM2 products and certain
related assets from Cypress Semiconductor and for the Aeluros
Acquisition.
Our financing
activities provided net cash of $7.7 million for the year ended
December 31, 2007, primarily from proceeds of stock option exercises of
$8.3 million, and tax benefit from stock-based awards of $2.5 million. Cash
provided by financing activities was offset by repayment of software license and
other obligations of $3.1 million.
Capital
Resources
We believe
that our existing cash balance of $44.3 million as of December 31, 2009 and our
available senior secured revolving credit facility of $25 million will be
sufficient to meet our anticipated cash needs for at least the next twelve
months. Our anticipated cash needs in the next twelve months include the
potential payments of up to $15.9 million under the earn-out provisions of the
RMI merger agreement to the holders of RMI common stock. Of the estimated
acquisition-related contingent consideration liability recorded as of December
31, 2009 of $11.7 million, approximately $0.4 million would be payable in cash
and $11.3 million payable in stock.
Although in
recent years we have generated sufficient net cash from operations to meet our
capital requirements, we will be substantially larger with greater operating
cash needs as a result of the acquisitions of IDT NSE and RMI. Our future cash
needs will depend on many factors, including the amount of revenue we generate,
the timing and extent of spending to support product development efforts, the
expansion of sales and marketing activities, the timing of introductions of new
products, the costs to ensure access to adequate manufacturing capacity, and the
continuing market acceptance of our products, and any future business
acquisitions that we might undertake. We may seek additional funding
through public or private equity or debt financing, and have a shelf
registration allowing us to sell up to approximately $120 million of our
securities from time to time during the next three years. However,
additional funding could be constrained by the terms and covenants under our
senior secured credit facility and may not be available on terms acceptable to
us or at all. We also might decide to raise additional capital at such
times and upon such terms as management considers favorable and in our
interests, including, but not limited to, from the sale of our debt and/or
equity securities (before reductions for expenses, underwriting discounts and
commissions) under our shelf registration statement, but we cannot be certain
that we will be able to complete offerings of our securities at such times and
on such terms as we may consider desirable for us.
Contractual
Obligations
Our principal
commitments as of December 31, 2009 are summarized below (in
thousands):
|
Total
|
Less
than
1
year
|
1
- 3
years
|
4
-5
years
|
After
5
years
|
||||||||||||||||
|
Operating
lease obligations
|
$ | 4,519 | $ | 3,253 | $ | 952 | $ | 314 | $ | - | ||||||||||
|
Software
license obligations
|
5,446 | 3,037 | 2,409 | - | - | |||||||||||||||
|
Wafer
purchases
|
20,684 | 20,684 | - | - | - | |||||||||||||||
|
Acquisiton-related
contingent consideration
|
11,687 | 11,687 | ||||||||||||||||||
|
Total
|
$ | 42,336 | $ | 38,661 | $ | 3,361 | $ | 314 | $ | - | ||||||||||
In
addition to the enforceable and legally binding obligations quantified in the
table above, we have other obligations for goods and services entered into in
the normal course of business. These obligations, however, either are not
enforceable or legally binding or are subject to change based on our business
decisions.
In addition,
due to uncertainty with respect to timing of future cash flows associated with
our unrecognized tax benefits at December 31, 2009, we are unable to make a
reasonably reliable estimate of the period of cash settlement with the
respective taxing authority. Therefore, $44.1 million of unrecognized tax
benefits have been excluded from the contractual obligations table above. See
Note 7. – Income Taxes or a discussion on Income Taxes.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, we had no off-balance sheet arrangements as defined in
SEC regulations.
Indemnities, Commitments and Guarantees
In the normal
course of business, we have made certain indemnities, commitments and guarantees
under which we may be required to make payments in relation to certain
transactions. These include agreements to indemnify our customers with respect
to liabilities associated with the infringement of other parties’ technology
based upon our products, obligations to indemnify our lessors under facility
lease agreements, and obligations to indemnify our directors and officers to the
maximum extent permitted under the laws of the state of Delaware. The duration
of such indemnification obligations, commitments and guarantees varies and, in
certain cases, is indefinite. We have not recorded any liability for any such
indemnification obligations, commitments and guarantees in the accompanying
balance sheets. We do, however, accrue for losses for any known contingent
liability, including those that may arise from indemnification provisions, when
future payment is estimable and probable.
Under master
purchase agreements signed with Cisco in November 2005, we have agreed to
indemnify Cisco for costs incurred in rectifying epidemic failures, up to the
greater of (on a per claim basis) 25% of all amounts paid to us by Cisco during
the preceding 12 months (approximately, $15.4 million at December 31, 2009) or
$9.0 million, plus replacement costs. If we are required to make payments under
the indemnity, our operating results may be adversely
affected.
Significant Accounting
Pronouncements
In September
2009, the FASB issued Update No. 2009-13 or ASU 2009-13, which updates the
guidance currently included under topic ASC 605-25, Multiple Element
Arrangements. ASU 2009-13 relates to the final consensus reached by FASB on a
new revenue recognition guidance regarding revenue arrangements with multiple
deliverables. The new accounting guidance addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. The new accounting guidance is effective for
fiscal years beginning after June 15, 2010 and may be applied retrospectively or
prospectively for new or materially modified arrangements. In addition, early
adoption is permitted. The Company is currently evaluating the potential impact,
if any, of the new accounting guidance on its consolidated financial
statements.
Effective
July 1, 2009, we adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their own right.
ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification.
Effective
April 1, 2009, we adopted FASB ASC 855-10, Subsequent Events – Overall
(“ASC 855-10”). ASC 855-10 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date – that is, whether that date represents the
date the financial statements were issued or were available to be
issued. This disclosure should alert all users of financial statements that
an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. Adoption of ASC 855-10 did not have a
material impact on our consolidated results of operations or financial
condition.
Effective
January 1, 2009, we adopted the FASB ASC 805, Business Combinations (“ASC
805”). ASC 805 updated guidance related to business
combinations. The updated guidance establishes principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The updated standard also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The updated standard also provides guidance for
recognizing changes in an acquirer’s existing income tax valuation allowances
and tax uncertainty accruals that result from a business combination transaction
as adjustments to income tax expense. The updated guidance had a material impact
on our consolidated financial statements during the year ended December 31,
2009. In fiscal
2009, we completed the IDT NSE and RMI acquisitions. Under the updated
guidance we expensed the transaction costs associated with the IDT NSE and
RMI acquisitions, while under the prior accounting standards such costs would
have been capitalized. In addition, we recognized the fair value of a
contingent earn-out liability in connection with the RMI acquisition
of $9.7 million, and subsequently recognized an expense of $2.0 million
related to the change in the estimated fair value of contingent earn-out
liability, while under the prior accounting standards
the earn-out would not have been recognized as part of the
consideration transferred until the contingency was resolved. Further, we
acquired in-process research and development of $46.5 million in connection with
the RMI acquisition which has been capitalized in accordance with the updated
guidance, whereas under prior authoritative guidance the amount would have been
expensed immediately. Therefore, the adoption of the updated guidance related to
business combinations has had and likely will continue to have a material impact
on our future consolidated financial statements.
The primary
objective of our investment activities is to preserve principal while maximizing
the income we receive from our investments without significantly increasing the
risk of loss. Some of the investment securities permitted under our cash
management policy may be subject to market risk for changes in interest rates.
To mitigate this risk, we maintain a portfolio of cash equivalent and short-term
investments in a variety of securities which may include money market funds,
government debt issued by the United States of America, state debt, certificates
of deposit and investment grade corporate debt. Presently, we are exposed to
minimal market risks associated with interest rate changes. We manage the
sensitivity of our results of operations to these risks by maintaining
investment grade short-term investments. Our cash management policy does not
allow us to purchase or hold derivative or commodity instruments or other
financial instruments for trading purposes. Additionally, our policy stipulates
that we periodically monitor our investments for adverse material holdings
related to the underlying financial solvency of the issuer. As of
December 31, 2009, our investments consisted of money market funds. Our
results of operations and financial condition would not be significantly
impacted by either a 10% increase or decrease in interest rates due mainly to
the short-term nature of our investment portfolio.
Our sales
outside the United States are transacted in U.S. dollars; accordingly our
sales are not generally impacted by foreign currency rate changes. Our operating
expenses are denominated primarily in U.S. Dollars, except for expenses incurred
by our wholly owned subsidiaries which are denominated in the local currency. To
date, fluctuations in foreign currency exchange rates have not had a material
impact on our results of operations.
NETLOGIC
MICROSYSTEMS, INC.
Index
to Financial Statements
|
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
60 |
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
61 |
|
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007
|
|
62 |
|
Consolidated
Statement of Stockholders’ Equity and Comprehensive Income for the years
ended December 31, 2009, 2008 and 2007
|
|
63 |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008
and 2007
|
|
64 |
|
Notes
to Consolidated Financial Statements
|
|
65 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
NetLogic
Microsystems, Inc.:
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of NetLogic Microsystems, Inc. and its subsidiaries at December 31,
2009 and December 31, 2008 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As discussed
in Note 1 of the Notes to Consolidated Financial Statements, in 2009 the Company
changed the manner in which it accounts for business combinations.
A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
San Jose,
California
February
24, 2010
NETLOGIC
MICROSYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
(IN
THOUSANDS)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 44,278 | $ | 83,474 | ||||
|
Short-term
investments
|
- | 13,067 | ||||||
|
Accounts
receivables, net
|
25,137 | 8,382 | ||||||
|
Inventories
|
45,113 | 13,707 | ||||||
|
Deferred
income taxes
|
13,157 | 3,217 | ||||||
|
Prepaid
expenses and other current assets
|
8,638 | 1,937 | ||||||
|
Total
current assets
|
136,323 | 123,784 | ||||||
|
Property
and equipment, net
|
13,278 | 5,513 | ||||||
|
Goodwill
|
112,918 | 68,712 | ||||||
|
Intangible
assets, net
|
223,345 | 39,538 | ||||||
|
Other
assets
|
46,247 | 8,224 | ||||||
|
Total
assets
|
$ | 532,111 | $ | 245,771 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 17,937 | $ | 7,618 | ||||
|
Accrued
liabilities
|
34,205 | 25,920 | ||||||
|
Contingent
earn-out liability
|
11,687 | - | ||||||
|
Deferred
margin
|
2,667 | 1,638 | ||||||
|
Software
licenses and other obligations, current
|
3,037 | 755 | ||||||
|
Total
current liabilities
|
69,533 | 35,931 | ||||||
|
Software
licenses and other obligations, long-term
|
2,409 | 464 | ||||||
|
Other
liabilities
|
34,214 | 9,109 | ||||||
|
Total
liabilities
|
106,156 | 45,504 | ||||||
|
Stockholders'
equity
|
||||||||
|
Preferred
stock; 50,000 shares authorized at December 31, 2009 and 2008;
none
issued and outstanding at December 31, 2009 and 2008
|
- | - | ||||||
|
Common
stock; 200,000 shares authorized at December 31, 2009 and 2008;
28,742
and 21,908 shares issued and outstanding at December 31, 2009 and
2008
|
287 | 219 | ||||||
|
Additional
paid-in capital
|
548,811 | 276,042 | ||||||
|
Accumulated
other comprehensive loss
|
- | (13 | ) | |||||
|
Accumulated
deficit
|
(123,143 | ) | (75,981 | ) | ||||
|
Total
stockholders' equity
|
425,955 | 200,267 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 532,111 | $ | 245,771 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
NETLOGIC
MICROSYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
$ | 174,689 | $ | 139,927 | $ | 109,033 | ||||||
|
Cost
of revenue
|
99,251 | 61,616 | 44,732 | |||||||||
|
Gross
profit
|
75,438 | 78,311 | 64,301 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
73,631 | 51,607 | 45,175 | |||||||||
|
Selling,
general and administrative
|
43,931 | 26,567 | 19,672 | |||||||||
|
Change
in contingent earn-out liability
|
2,008 | - | - | |||||||||
|
Acquisition-related
costs
|
5,412 | - | - | |||||||||
|
In-process
research and development
|
- | - | 1,610 | |||||||||
|
Total
operating expenses
|
124,982 | 78,174 | 66,457 | |||||||||
|
Income
(loss) from operations
|
(49,544 | ) | 137 | (2,156 | ) | |||||||
|
Interest
income
|
992 | 1,595 | 4,431 | |||||||||
|
Interest
expense
|
(1,666 | ) | (33 | ) | - | |||||||
|
Other
income and expense, net
|
(4 | ) | (59 | ) | 32 | |||||||
|
Income
(loss) before income taxes
|
(50,222 | ) | 1,640 | 2,307 | ||||||||
|
Benefit
from income taxes
|
(3,060 | ) | (1,937 | ) | (288 | ) | ||||||
|
Net
income (loss)
|
$ | (47,162 | ) | $ | 3,577 | $ | 2,595 | |||||
|
Net
income (loss) per share-basic
|
$ | (2.04 | ) | $ | 0.17 | $ | 0.13 | |||||
|
Net
income (loss) per share-diluted
|
$ | (2.04 | ) | $ | 0.16 | $ | 0.12 | |||||
|
Shares
used in calculation-basic
|
23,091 | 21,472 | 20,747 | |||||||||
|
Shares
used in calculation-diluted
|
23,091 | 22,314 | 21,938 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
NETLOGIC
MICROSYSTEMS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN
THOUSANDS)
|
Common
Stock
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Deferred
Stock-based
Compensation
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Accumulated
Deficit
|
Total
Stockholder's
Equity
|
||||||||||||||||||||||
|
Balance
at December 31, 2006
|
20,439 | $ | 204 | $ | 224,647 | $ | (182 | ) | $ | 8 | $ | (82,153 | ) | $ | 142,524 | |||||||||||||
|
Issuance
of stock under stock compensation plans
|
875 | 9 | 8,339 | - | - | 8,348 | ||||||||||||||||||||||
|
Amortization
of deferred stock-based compensation
|
- | - | - | 179 | - | - | 179 | |||||||||||||||||||||
|
Reversal
of deferred stock-based compensation due to terminations
|
- | - | (3 | ) | 3 | - | - | - | ||||||||||||||||||||
|
Recording
of stock-based compensation expense
|
- | - | 15,793 | - | - | - | 15,793 | |||||||||||||||||||||
|
Tax
benefits of stock options
|
- | - | 2,465 | - | - | - | 2,465 | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | (16 | ) | - | (16 | ) | |||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 2,595 | 2,595 | |||||||||||||||||||||
|
Total
comprehensive income
|
2,579 | |||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
21,314 | 213 | 251,241 | - | (8 | ) | (79,558 | ) | 171,888 | |||||||||||||||||||
|
Issuance
of stock under stock compensation plans
|
594 | 6 | 7,879 | - | - | - | 7,885 | |||||||||||||||||||||
|
Recording
of stock-based compensation expense
|
- | - | 16,354 | - | - | - | 16,354 | |||||||||||||||||||||
|
Tax
benefits of stock options
|
- | - | 568 | - | - | - | 568 | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | (45 | ) | - | (45 | ) | |||||||||||||||||||
|
Unrealized
gain (loss) on short-term investments
|
- | - | - | - | 40 | - | 40 | |||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 3,577 | 3,577 | |||||||||||||||||||||
|
Total
comprehensive income
|
3,572 | |||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
21,908 | 219 | 276,042 | - | (13 | ) | (75,981 | ) | 200,267 | |||||||||||||||||||
|
Issuance
of common stock in connection with the acquisition of RMI
|
4,960 | 50 | 188,477 | - | - | - | 188,527 | |||||||||||||||||||||
|
Issuance
of common stock in connection with stock offering, net of share issuance
costs of $71
|
700 | 7 | 29,653 | - | - | - | 29,660 | |||||||||||||||||||||
|
Issuance
of stock under stock compensation plans
|
1,174 | 12 | 12,890 | - | - | - | 12,902 | |||||||||||||||||||||
|
Recording
of stock-based compensation expense
|
- | - | 40,660 | - | - | - | 40,660 | |||||||||||||||||||||
|
Tax
benefits of stock options
|
- | - | 1,089 | - | - | - | 1,089 | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Unrealized
gain on short-term investments
|
- | - | - | - | 13 | - | 13 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (47,162 | ) | (47,162 | ) | |||||||||||||||||||
|
Total
comprehensive income
|
(47,149 | ) | ||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
28,742 | $ | 287 | $ | 548,811 | $ | - | $ | - | $ | (123,143 | ) | $ | 425,955 | ||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
NETLOGIC
MICROSYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
(loss) income
|
$ | (47,162 | ) | $ | 3,577 | $ | 2,595 | |||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
|
Depreciation
and amortization
|
25,361 | 17,213 | 9,134 | |||||||||
|
Loss
on disposal of property and equipment
|
6 | 106 | 38 | |||||||||
|
Write-off
debt issuance costs related to secured term notes
|
524 | - | - | |||||||||
|
Accretion
of discount relating to debt securities
|
- | (13 | ) | (709 | ) | |||||||
|
Stock-based
compensation
|
40,755 | 16,492 | 16,046 | |||||||||
|
Provision
for (recovery of) doubtful accounts
|
4 | 49 | (25 | ) | ||||||||
|
Provision
for inventory reserves
|
1,861 | 2,441 | 1,022 | |||||||||
|
In-process
research and development
|
- | - | 1,610 | |||||||||
|
Deferred
income taxes, net
|
(4,601 | ) | (3,893 | ) | (1,688 | ) | ||||||
|
Excess
tax benefit from stock-based awards
|
(1,506 | ) | (717 | ) | (2,465 | ) | ||||||
|
Net
impact of deferred tax asset valuation allowance release and tax effect
of
intercompany
license agreement
|
- | - | (504 | ) | ||||||||
|
Changes
in current assets and liabilities, net of effects of
acquisitions:
|
||||||||||||
|
Accounts
receivables
|
(7,544 | ) | 6,571 | (4,471 | ) | |||||||
|
Inventories
|
17,926 | (1,448 | ) | 1,479 | ||||||||
|
Prepaid
expenses and other assets
|
(1,054 | ) | 646 | (1,312 | ) | |||||||
|
Accounts
payable
|
6,379 | 524 | 971 | |||||||||
|
Accrued
liabilities
|
13,755 | (2,084 | ) | 1,947 | ||||||||
|
Contingent
earn-out liability
|
2,008 | - | - | |||||||||
|
Deferred
margin
|
1,567 | 1,321 | 263 | |||||||||
|
Other
long-term liabilities
|
(28 | ) | 1,071 | 976 | ||||||||
|
Net
cash provided by operating activities
|
48,251 | 41,856 | 24,907 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of property and equipment
|
(1,237 | ) | (1,438 | ) | (2,220 | ) | ||||||
|
Purchase
of short-term investments
|
(14,633 | ) | (13,014 | ) | (13,935 | ) | ||||||
|
Sales
and maturities of short-term investments
|
27,700 | - | 53,771 | |||||||||
|
Purchase
of long term investment
|
(1,500 | ) | - | - | ||||||||
|
Purchase
of intangible assets
|
(400 | ) | - | - | ||||||||
|
Loan
to RMI
|
(15,000 | ) | - | - | ||||||||
|
Cash
received from (paid for) acquisitions
|
(107,448 | ) | 200 | (70,245 | ) | |||||||
|
Cash
paid for Aeluros earn out
|
(15,501 | ) | - | - | ||||||||
|
Net
cash used in investing activities
|
(128,019 | ) | (14,252 | ) | (32,629 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from line of credit and term notes
|
48,000 | - | - | |||||||||
|
Payment
of principal of line of credit and term notes
|
(48,000 | ) | - | - | ||||||||
|
Proceeds
from issuance of common stock
|
17,183 | 8,774 | 9,843 | |||||||||
|
Proceeds
from issuance of common stock in connection with a stock
offering
|
29,660 | - | - | |||||||||
|
Payments
of software license and other obligations
|
(2,338 | ) | (3,376 | ) | (3,139 | ) | ||||||
|
Payments
of debt issuance costs
|
(1,158 | ) | - | - | ||||||||
|
Tax
payments related to vested awards
|
(4,281 | ) | (889 | ) | (1,495 | ) | ||||||
|
Excess
tax benefit from stock-based awards
|
1,506 | 717 | 2,465 | |||||||||
|
Net
cash provided by financing activities
|
40,572 | 5,226 | 7,674 | |||||||||
|
Effects
of exchange rate on cash and cash equivalents
|
- | (45 | ) | (15 | ) | |||||||
|
Net
increase (decrease) in cash and cash eqivalents
|
(39,196 | ) | 32,785 | (63 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
83,474 | 50,689 | 50,752 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 44,278 | $ | 83,474 | $ | 50,689 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ | 916 | $ | 19 | $ | - | ||||||
|
Cash
paid for income taxes
|
$ | 391 | $ | 562 | $ | 4,665 | ||||||
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
||||||||||||
|
Acquisition
of property and equipment under capital leases and software
licenses
obligations
|
$ | 7,189 | $ | 2,350 | $ | 1,697 | ||||||
|
Accrual
for Aeluros earn-out payment
|
$ | - | $ | 15,501 | $ | - | ||||||
|
Issuance
of common stock in connection with the acquisition of RMI
|
$ | 188,527 | $ | - | $ | - | ||||||
|
Issuance
of common stock to RMI employees
|
$ | 9,285 | $ | - | $ | - | ||||||
|
Initial
contingent earn-out liability
|
$ | 9,679 | $ | - | $ | - | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2009
NOTE
1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The
Company
Netlogic
Microsystems, Inc. is a leading fabless semiconductor company that designs,
develops and sells proprietary high-performance processors and high speed
integrated circuits that are used to enhance the performance and functionality
of advanced 3G/4G mobile wireless infrastructure, data center, enterprise, metro
Ethernet, edge and core infrastructure networks. The Company’s
market-leading product portfolio includes high-performance multi-core
processors, knowledge-based processors, high-speed 10/40/100 Gigabit Ethernet
physical layer devices, network search engines, and ultra low-power embedded
processors. These products are designed into high-performance systems
such as switches, routers, wireless base stations, radio network controllers,
security appliances, networked storage appliances, service gateways and
connected media devices offered by leading original equipment
manufacturers.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company's
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue
recognition
The Company
derives its revenue primarily from its sales of semiconductor products. The
Company recognizes revenue when all of the following criteria have been met:
(i) persuasive evidence of a binding arrangement exists, (ii) delivery
has occurred, (iii) the price is deemed fixed or determinable and free of
contingencies and significant uncertainties, and (iv) collection is
probable. The price is considered fixed or determinable at the execution of an
agreement, based on specific products and quantities to be delivered at
specified prices, which is often memorialized with a customer purchase order.
The Company assesses the ability to collect from the Company’s customers based
on a number of factors, including credit worthiness and any past transaction
history of the customer.
Shipping
charges billed to customers are included in product revenue and the related
shipping costs are included in cost of revenue. The Company recognizes revenue
at the time of shipment to OEM customers their contract manufacturers and the
Company’s international sales representatives. Revenue consists primarily of
sales of the Company’s products to OEMs, its contract manufacturers or its
distributors. Initial sales of the Company’s products for a new design are
usually made directly to OEMs as it designs and develops its product.
Once the design enters production, the Company often
outsources its manufacturing to contract manufacturers that purchase the
Company’s products directly from the Company or from the Company’s
distributors.
Product
revenue and costs relating to sales made through distributors with rights of
return and price credits are deferred until the distributors sell the product to
end customers because the selling price is not fixed and determinable and the
Company is not able to estimate future returns. Revenue recognition depends on
notification from the distributor that product has been sold to an end
customers. On each reporting date the Company records a
reduction in accounts receivables and deferred revenue based on the
Company's estimate of the margin to be ultimately recognized upon sale of the
product to an end customer.
The Company
has entered into a purchase agreement with Wintec who has become the primary
purchaser of its products on a consignment basis for resale to Cisco and
its contract manufacturers. The Company recognizes revenue when Wintec
ships its product to Cisco or its contract manufacturers.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31,
2009
Warranty
The Company
provides a limited warranty on its products for a period ranging from one to
five years from the date of sale. The Company provides for the estimated
future costs of repair or replacement upon shipment of the product. The warranty
accrual is estimated based on historical claims compared to actual revenue and
assumes that the Company has to replace products subject to a
claim.
Cash,
cash equivalents, short-term investments, and long-term investments
The Company
considers all highly liquid investments purchased with a remaining maturity of
three months or less at the date of purchase to be cash equivalents. These
investments consist of money-market funds, which are readily convertible to cash
and are stated at cost, which approximates market value. The Company deposits
cash and cash equivalents with high credit quality financial
institutions.
Short-term
investments as of December 31, 2008 consisted of government agency debt
securities with remaining contractual maturities on the date of purchase greater
than 90 days but less than one year. Investments in debt securities are
classified as available-for-sale and carried at fair value. The cost of
securities sold is based on the specific identification
method. Investments are monitored for impairment periodically and
reductions in carrying value are recorded when the declines are determined to be
other-than-temporary.
From time to
time the Company makes equity investments in non-publicly traded companies.
These investments are included in “Other assets” on the accompanying
Consolidated Balance Sheets and are accounted for under the cost method as the
Company does not have the ability to exercise significant influence over the
respective investee’s operating and financial policies. The Company monitors its
investments in non-publicly traded companies for impairment on a quarterly basis
and make appropriate reductions in carrying values when such impairments are
determined to be other-than-temporary. Factors considered in determining an
impairment include, but are not limited to, the current business environment
including competition and uncertainty of financial condition, going concern
considerations such as the rate at which the investee company utilizes cash and
the investee company’s ability to obtain additional private financing to fulfill
its stated business plan, the need for changes to the investee company’s
existing business model due to changing business environments and its ability to
successfully implement necessary changes, and comparable valuations. If an
investment is determined to be impaired, a determination is made as to whether
such impairment is other-than-temporary.
As of December 31,
2009, Other Assets included $1.5 million of an equity holding in a non-publicly
traded company that was recorded using the cost method.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Risks
and uncertainties and concentration of credit risk
While the
Company has achieved profitability in recent years, it has reported a net
loss for 2009 and has a history of net losses prior to 2005. The
Company's ability to remain profitable is dependent, among other factors,
upon the rate of growth of the target markets, continued customer acceptance
of its products, continued end-user acceptance of its customer’s
products, the strategic position of its products related to current or
future competitors, its ability to develop new products that fulfill
customer’s specifications, its ability to lower cost of goods sold through yield
improvements and its ability to manage expenses. If the Company is unable to
achieve profitability, it could be required, or could elect, to seek
additional funding through public or private equity or debt financing. Such
funds may not be available on terms acceptable to the Company or at
all.
The Company
depends on a few key customers for a substantial majority of it sales and the
loss of, or a significant reduction in orders from any of them would likely
significantly reduce revenues. For the years ended December 31, 2009, 2008,
and 2007, the Company’s top five customers in terms of revenue accounted for
approximately 68%, 68%, and 79% of total product revenue, respectively. Because
of the substantial market share owned by its top five customers, the Company’s
revenue in the foreseeable future will likely continue to depend on sales to a
relatively small number of customers, as well as the ability of these customers
to sell products that use the Company's products. The Company’s revenue would
likely decline if one or more of these customers were to significantly reduce,
delay or cancel their orders for any reason. In addition, any difficulty
associated with collecting outstanding accounts receivable amounts due from its
customers, particularly for the top five customers, would harm the Company’s
financial performance. Because the Company’s sales are based upon standard
purchase orders and not on long-term contracts, it cannot assure you
that its customers will continue to purchase its products at
current levels, or at all.
The Company
purchases all of its semiconductor products from third party foundries.
Because future foundry capacity may be limited and because the Company does not
have long-term supply agreements with its foundries, it may not be
able to secure adequate manufacturing capacity to satisfy the demand for its
products. Although the Company presently utilizes multiple foundries for
wafers, it relies primarily on one foundry for current generation products.
The Company provides the foundries with monthly rolling forecasts of its
production requirements. The ability of each foundry to provide wafers to the
Company could become limited in the future, by the foundry’s available capacity.
Moreover, the price of the Company’s wafers may fluctuate based on changes in
available industry capacity. Because the Company does not have long-term supply
contracts with any of its foundries, they could choose to prioritize
capacity for other customers, particularly larger customers, reduce or eliminate
deliveries to them on short notice or increase the prices they charge them.
Accordingly, the Company cannot be certain that its foundries will allocate
sufficient capacity to satisfy its requirements. If the Company is not able
to obtain foundry capacity as required, its relationships with present and
future customers would be harmed and its revenue, gross margin and
operating results would be materially impacted.
Financial
instruments that potentially subject the Company to a concentration of credit
risk as of December 31, 2009 consist of cash and accounts receivables.
Deposits held with financial institutions may exceed the amount of insurance
provided on such deposits. To date the Company has not experienced any losses
on its deposits of cash, cash equivalents, and short-term investments. The
Company’s accounts receivables are derived from revenue earned from customers
primarily located in North America and Asia. The Company performs ongoing credit
evaluations of its customers’ financial condition and, generally, does not
require collateral. In general, such allowances are established for
accounts aged over 90 days from the invoice date, unless specific circumstances
indicate that the balance is collectible.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
The
following table summarizes revenue from bill-to customers comprising 10% or more
of the Company’s net revenue for the periods indicated:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Wintec
Industries Inc
|
33 | % | 35 | % | 17 | % | ||||||
|
Celestica
Corporation
|
* | 12 | % | * | ||||||||
|
Solectron
Corporation
|
* | * | 28 | % | ||||||||
|
Sanmina
Corporation
|
14 | % | * | 11 | % | |||||||
|
*
|
Less
than 10% of net revenue
|
The following
table summarizes customers comprising 10% or more of the Company’s gross account
receivable for the periods indicated:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Wintec
Industries Inc ( Supplier to Cisco Systems, Inc.)
|
26 | % | 48 | % | ||||
|
Huawei
|
14 | % | * | |||||
|
Flextronics
|
12 | % | * | |||||
|
Celestica
Corporation
|
* | 15 | % | |||||
|
Sanmina
Corporation
|
* | 12 | % | |||||
|
Jabil
Circuit Incorporated
|
* | 11 | % | |||||
|
*
|
Less
than 10% of gross accounts
receivable
|
Inventory Valuation and Adverse
Purchase Commitments
The Company
values its inventories at the lower of cost or market. The Company records
inventory reserves for estimated obsolescence or unmarketable inventories based
upon assumptions about future demand and market conditions. These estimates are
generally based on a 12-month forecast prepared by management. Once a reserve is
established, it is maintained until the product to which it relates is sold or
otherwise disposed of. If actual market conditions are less favorable than those
expected by management, additional adjustment to inventory valuation may be
required. The carrying value of inventory and the determination of possible
adverse purchase commitments are dependent on the Company's estimate
of the yield that will be achieved, or the percent of good products identified
when the product is tested.
Property
and equipment
Property and
equipment are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Leased assets and
leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful life of the asset or the term of the
lease.
The
depreciation and amortization periods for property and equipment categories are
as follows:
|
Machinery
and equipment
|
3
years
|
|
Software
|
3
years
|
|
Furniture
and fixtures
|
5
years
|
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Long-lived
Assets and Intangible Assets
The Company
assesses the impairment of long-lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. Whenever events or changes in circumstances
suggest that the carrying amount of long-lived assets may not be recoverable,
the Company estimates the future cash flows expected to be generated by the
asset from its use or eventual disposition. If the sum of the expected future
cash flows, which includes revenue, is less than the carrying amount of those
assets, the Company recognizes an impairment loss based on the excess of the
carrying amount over the fair value of the assets. Significant management
judgment is required in the forecasts of future operating results that are used
in the discounted cash flow method of valuation.
Goodwill
Goodwill is
recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the net tangible and intangible assets
acquired and liabilities assumed. The Company evaluates goodwill for impairment
at least on an annual basis or whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable from its estimated
future cash flow. The Company performs the goodwill impairment test for each
reporting unit. If the fair value of the reporting unit exceeds the
carrying value of the reporting unit, goodwill is not impaired. The Company
performs its goodwill impairment assessment at the Company level, which is the
sole reporting unit. The Company performed its annual goodwill impairment
test in the fourth quarter and concluded there was no impairment charge relating
to goodwill during the years ended December 31, 2009, 2008, and
2007.
Fair
value of financial instruments
Carrying
amounts of certain of the Company's financial instruments including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable
and software license and other obligations approximate fair value due to the
short maturities and interest rates currently available to the
Company.
Foreign
currency
The
functional currency for all of the Company’s foreign subsidiaries is the United
States dollar. Assets and liabilities denominated in non-U.S. dollars are
re-measured into U.S. dollars at end-of-period exchange rates for monetary
assets and liabilities, and historical exchange rates for nonmonetary assets and
liabilities. Revenue and expenses are re-measured at average exchange rates in
effect during the period, except for those revenue and expenses related to the
nonmonetary assets and liabilities, which are measured at historical exchange
rates. The gains or losses from foreign currency re-measurement are included in
other income and expense, net. Such gains or losses were not material for the
years ended December 31, 2009 and 2008.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Segment
Reporting
ASC 280, Segment Reporting,
establishes standards for the reporting of information about operating segments,
including related disclosures about products and services, geographic areas and
major customers. The standard for determining what information to report is
based on available financial information that is regularly reviewed and used by
the Company’s chief executive officer, or CEO, who is the chief operating
decision maker in evaluating its financial performance and resource allocation.
Based on the criteria stated in ASC 280 for determining separately reportable
operating segments and the financial information available to and reviewed by
the CEO, the Company has determined that it operates as a single operating and
reportable segment.
Income
taxes
The Company
accounts for income taxes under an asset and liability approach that requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of timing differences between the carrying amounts and the tax
bases of assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to be
realized.
In the first
quarter of fiscal 2007, the Company adopted ASC 740-10 Income Taxes. As a
result the Company recognizes liabilities for uncertain tax positions based on
the two-step process prescribed in the accounting guidance. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires the Company to estimate
and measure the tax benefit as the largest amount that is more than 50% likely
to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as the Company has to determine the
probability of various possible outcomes. The Company reevaluates these
uncertain tax positions on a quarterly basis. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and new audit
activity. Such a change in recognition or measurement would result in the
recognition of a tax benefit or an additional charge to the tax
provision.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Computation
of net income (loss) per share
The Company
has computed net income (loss) per share under two methods, basic and diluted.
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the sum of the weighted average number of common
shares outstanding and potential common shares (when dilutive).
The following
table sets forth the computation of basic and diluted net income (loss)
attributable to common stockholders per share (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income (loss): basic and diluted
|
$ | (47,162 | ) | $ | 3,577 | $ | 2,595 | |||||
|
Denominator:
|
||||||||||||
|
Add:
common shares outstanding
|
23,091 | 21,506 | 20,781 | |||||||||
|
Less:
unvested common shares subject to repurchase
|
- | (34 | ) | (34 | ) | |||||||
|
Total
shares: basic
|
23,091 | 21,472 | 20,747 | |||||||||
|
Add:
impact of stock options and warrants outstanding
|
- | 808 | 1,157 | |||||||||
|
Add:
shares subject to repurchase
|
- | 34 | 34 | |||||||||
|
Total
shares: diluted
|
23,091 | 22,314 | 21,938 | |||||||||
|
Net
income (loss) per share - basic
|
$ | (2.04 | ) | $ | 0.17 | $ | 0.13 | |||||
|
Net
income (loss) per share - diluted
|
$ | (2.04 | ) | $ | 0.16 | $ | 0.12 | |||||
The following
numbers of shares underlying outstanding common stock options were excluded from
the computation of diluted net income (loss) per share as they had an
anti-dilutive effect (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Stock
options
|
2,128 | 2,239 | 1,665 | |||||||||
Advertising
costs
Advertising
costs are expensed as incurred. Advertising costs were not significant in the
years ended December 31, 2009, 2008 and 2007.
Research and
development
Research and
development costs are expensed as incurred.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Stock-based compensation
The Company
estimates the fair value of stock options using the Black-Scholes
Model. The Black-Scholes Model requires the input of highly subjective
assumptions, including the option’s expected life and the price volatility of
the underlying stock. The expected stock price volatility assumption was
determined using both the historical and implied volatility of the Company’s
common stock. Changes in the subjective assumptions required in the valuation
models may significantly affect the estimated value of the awards, the related
stock-based compensation expense and, consequently, the Company’s results of
operations.
Stock-based
compensation expense recognized for the years ended December 31, 2009, 2008
and 2007 was $40.8 million, $16.5 million and $16.0 million, respectively and
related to employee stock grants.
ASC 718
requires companies to estimate the fair value of option and ESPP awards on the
date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s Consolidated Statement of Operations.
Prior to the adoption of ASC 718 in January 1, 2006, the Company accounted for
stock-based awards using the intrinsic value method. Under the intrinsic value
method, no stock-based compensation expense for options had been recognized in
the Company’s Consolidated Statement of Operations if the exercise price
of its stock options granted to employees and directors equaled the
fair market value of the underlying stock at the date of grant.
Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the Company’s Consolidated
Statement of Operations for the years ended December 31, 2009, 2008
and 2007 included (i) compensation expense for share-based
payment awards granted prior to, but not yet vested as of, December 31,
2005 based on the grant date fair value estimated in accordance with the pro
forma provisions of ASC 718 prior to its revision, and (ii) compensation
expense for the share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value estimated in
accordance with the provisions of ASC 718. The Company attributes the value of
stock-based compensation to expense on a straight-line method for the awards
granted subsequent to December 31, 2005, while the accelerated method is
used for awards granted on or prior to December 31, 2005. As stock-based
compensation expense recognized in the Consolidated Statement of Operations for
the years ended December 31, 2009, 2008 and 2007 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. ASC
718 requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Recent
accounting pronouncements
In September
2009, the FASB issued Update No. 2009-13 or ASU 2009-13, which updates the
guidance currently included under topic ASC 605-25, Multiple Element
Arrangements. ASU 2009-13 relates to the final consensus reached by FASB on a
new revenue recognition guidance regarding revenue arrangements with multiple
deliverables. The new accounting guidance addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. The new accounting guidance is effective for
fiscal years beginning after June 15, 2010 and may be applied retrospectively or
prospectively for new or materially modified arrangements. In addition, early
adoption is permitted. The Company is currently evaluating the potential impact,
if any, of the new accounting guidance on its consolidated financial
statements.
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their own right.
ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this Form
10-K have been updated for the Codification.
Effective
April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall
(“ASC 855-10”). ASC 855-10 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date – that is, whether that date represents the
date the financial statements were issued or were available to be
issued. This disclosure should alert all users of financial statements that
an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. Adoption of ASC 855-10 did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
Effective
January 1, 2009, the Company adopted the FASB ASC 805, Business Combinations (“ASC
805”). ASC 805 updated guidance related to business
combinations. The updated guidance establishes principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The updated standard also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The updated standard also provides guidance for
recognizing changes in an acquirer’s existing income tax valuation allowances
and tax uncertainty accruals that result from a business combination transaction
as adjustments to income tax expense. The updated guidance had a material impact
on the Company’s consolidated financial statements during the year ended
December 31, 2009. In fiscal
2009, the Company completed the IDT NSE and RMI acquisitions.
Under the updated guidance the Company expensed the transaction costs
associated with the IDT NSE and RMI acquisitions, while under the prior
accounting standards such costs would have been capitalized. In
addtion, the Company recognized the fair value of a contingent earn-out
liability in connection with the RMI acqusition of $9.7 million, and
subequently recognized an expense of $2.0 million related to the change in
the estimated fair value of contingent earn-out liability, while
under the prior accounting standards the earn-out would not have been
recognized as part of the consideration transferred until the contingency was
resolved. Further, the
Company acquired in-process research and development of $46.5 million in
connection with the RMI acuqisition which has been capitalized in accordance
with the updated guidance, whereas under prior authoritative guidance the amount
would have been expensed immediately. Therefore, the adoption of the updated
guidance related to business combinations has had and likely will continue to
have a material impact on our future consolidated financial
statements.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
2—Business Combinations and Asset Purchase
Business
Combinations:
Fiscal
2009:
RMI
Corporation
On October
30, 2009, the Company completed the acquisition of RMI Corporation (RMI), a
provider of high-performance and low-power multi-core, multi-threaded
processors. Pursuant to the Agreement and Plan of Merger Reorganization by and
among NetLogic Microsystems, Inc., Roadster Merger Corporation, RMI and WP VIII
Representative LLC dated as of May 31, 2009, or the merger agreement, on October
30, 2009, Roadster Merger Corporation was merged with and into RMI, and the
Company delivered merger consideration of approximately 5.0 million shares of
the Company’s common stock and $12.6 million cash to the paying agent for
distribution to the holders of RMI capital stock. Approximately 10% of the
shares of merger consideration common stock are being held in escrow as security
for claims and expenses that might arise during the first 12 months following
the closing date. The closing price of a share of the Company’s common stock on
October 30, 2009 was $38.01.
The Company
may be required to issue up to an additional 1.6 million shares of common stock
and pay up to an additional $15.9 million cash to the former holders of RMI
capital stock as earn-out consideration based upon achieving specified
percentages of revenue targets for either the 12-month period from October 1,
2009 through September 30, 2010, or the 12-month period from November 1, 2009
through October 31, 2010, whichever period results in the higher percentage of
the revenue target. The additional earn-out consideration, if any, net of
applicable indemnity claims, will be paid on or before December 31,
2010.
Fair
Value of Consideration Transferred
|
Issuance
of Netlogic common stock to RMI preferred shareholders
|
$ | 188,527 | ||
|
Payments
to RMI common shareholders in cash
|
12,582 | |||
|
Acquisition-related
contingent consideration
|
9,679 | |||
|
Other
adjustments
|
(837 | ) | ||
|
Total
|
$ | 209,951 |
In accordance
with ASC 805 Business Combinations, a liability was recognized for the estimated
merger date fair value of the acquisition-related contingent consideration based
on the probability of the achievement of the revenue target. Any change in the
fair value of the acquisition-related contingent consideration subsequent to the
merger date, including changes from events after the acquisition date, such as
changes in the Company’s estimate of the revenue expected to be achieved and
changes in their stock price, will be recognized in earnings in the period the
estimated fair value changes. The fair value estimate assumes
probability-weighted revenues are achieved over the earn-out period. Actual
achievement of revenues at or below 75% of the revenue range for this assumed
earn-out period would reduce the liability to zero. If actual achievement of
revenues is at or above 100% of the revenue target, the RMI
stockholders will receive the maximum consideration of 1.6 million shares
and $15.9 million in cash. If the amount of revenue recognized is greater than
75% but less than 100% of the revenue target, the RMI stockholders will receive
an earn-out consideration that increases as the percentage gets closer to
100%. A change in the fair value of the acquisition-related contingent
consideration could have a material impact on the Company’s statement of
operations and financial position in the period of the change in
estimate.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
The estimated
initial earn-out liability was based on the Company’s probability assessment of
RMI’s revenue achievements during the earn-out period. In developing these
estimates, the Company considered the revenue projections of RMI management,
RMI’s historical results, and general macro-economic environment and industry
trends. This fair value measurement is based on significant revenue inputs not
observed in the market and thus represents a Level 3 measurement as defined by
ASC 820 Fair Value Measurements and Disclosures. Level 3 instruments are valued
based on unobservable inputs that are supported by little or no market activity
and reflect the Company’s own assumptions in measuring fair value. The Company
assumed a probability-weighted revenue achievement of approximately 80% of
target. The Company determined that the resulting earn-out consideration would
be 244,000 shares of its common stock and cash payment of approximately $0.4
million. The Company then applied its closing stock price of $38.01 as of
October 30, 2009 to the 244,000 shares and added $0.4 million to arrive at an
initial earn-out liability of $9.7 million.
As retention
incentive awards, under the definitive agreement the Company (i)
issued 244,268 fully vested shares of its common stock to specified former
RMI employees at the closing date for services through the consummation of the
merger, (ii) granted restricted stock units representing the rights to
acquire a total of 286,873 shares of common stock to
employees of RMI that will vest over the first 12 months of
post-closing employment with us, and (iii) granted restricted stock units
representing the rights to acquire a total of 949,208 shares
of common stock and stock options for the purchase of a
total of 682,523 shares of common stock options to former employees of RMI,
subject to vesting and other standard terms determined. The Company did not
assume any outstanding stock options or warrants to purchase capital stock of
RMI in the merger. The Company recorded the estimated stock-based compensation
expense of approximately $9.3 million relating to the 244,268 fully vested
shares of common stock in the fourth quarter of 2009.
Preliminary
Allocation of Consideration Transferred
The
acquisition was accounted for as a business combination under ASC 805 Business
Combinations. The estimated total preliminary purchase price of $210.0 million
was allocated to the net tangible and intangible assets acquired and liabilities
assumed based on their fair values as of the date of the completion of the
acquisition as follows (in thousands):
|
Net
tangible assets
|
$ | 49,829 | ||
|
Amortizable
intangible assets:
|
||||
|
Existing
and core technology
|
71,800 | |||
|
Customer
contracts and related relationships
|
13,800 | |||
|
Composite
intangible assets
|
2,700 | |||
|
Tradenames
and trademarks
|
2,200 | |||
|
Backlog
|
200 | |||
|
Indefinite-lived
intangible asset:
|
||||
|
In-process
research and development
|
46,500 | |||
|
Goodwill
|
22,922 | |||
|
Total
|
$ | 209,951 |
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
As of the
effective date of the merger, inventories are required to be measured at fair
value. The preliminary fair value of inventory of $37.7 million was based on
assumptions applied to the RMI acquired inventory balance. In estimating the
fair value of finished goods and work-in-progress inventory, the Company made
assumptions about the selling prices and selling cost associated with the
inventory. The Company assumed that estimated selling prices would yield gross
margins consistent with actual margins earned by RMI during the first half of
2009. The Company assumed that selling cost as a percentage of revenue would be
consistent with actual rates experienced by RMI during the first half of
2009.
Existing and
core technology consisted of products which have reached technological
feasibility and relate to the multi-core, multi-threaded processing products
(XLR and XLS) and the ultra low-power processing products (Au 1xxx). The value
of the developed technology was determined by discounting estimated net future
cash flows of these products. The Company is amortizing the existing and core
technology on a straight-line basis over estimated lives of 4 to 7
years.
Customer
relationships relate to the Company’s ability to sell existing and future
versions of products to existing RMI customers. The fair value of the customer
relationships was determined by discounting estimated net future cash flows from
the customer contracts. The Company is amortizing customer relationships on a
straight-line basis over an estimated life of 10 years.
Composite
intangible assets relate to matured legacy products. The fair value of the
developed technology was determined by discounting estimated net future cash
flows of these products. The Company is amortizing the composite intangible
assets on a straight-line basis over an estimated life of 2 years.
Tradename and
trademarks represents various RMI brands, registered product names and marks.
The fair value of tradename and trademarks was determined by estimating a
benefit from owning the asset rather than paying a royalty to a third party for
the use of the asset. The Company is amortizing the asset on a straight-line
basis over an estimated life of 3 years.
The backlog
fair value relates to the estimated selling cost to generate backlog at
October 30, 2009. The fair value of backlog at closing is being amortized
over an estimated life of 6 months.
In-process
research and development, or IPRD, consisted of the in-process project to
complete development of the XLP product. The value assigned to IPRD was
determined by considering the importance of products under development to the
overall development plan, estimating costs to develop the purchased IPRD into
commercially viable products, estimating the resulting net cash flows from the
projects when completed and discounting the net cash flows to their present
value. This methodology is referred to as the income approach, which discounts
expected future cash flows to present value. The discount rate used in the
present value calculations was derived from a weighted-average cost of capital
analysis, adjusted to reflect additional risks related to the product’s
development and success as well as the product’s stage of completion. Acquired
IPRD assets are initially recognized at fair value and are classified as
indefinite-lived assets until the successful completion or abandonment of the
associated research and development efforts. Accordingly, during the development
period after the acquisition date, these assets will not be amortized as charges
to earnings; instead this asset will be subject to periodic impairment testing.
Upon successful completion of the development process for the acquired IPRD
project, the asset would then be considered a finite-lived intangible asset and
amortization of the asset will commence. Development of the XLP technology is
currently estimated to be approximately 75% complete and expected to be
completed in the fourth quarter of 2010. Validation, testing and further re-work
may be required prior to achieving volume production which is anticipated to
occur in 2011. The estimated incremental cost to complete the XLP technology is
approximately $5.6 million.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Deferred tax
asset and liability associated with the estimated fair value adjustments of
assets acquired and liabilities assumed was recorded using the estimated
weighted average statutory tax rate in the jurisdictions where the fair value
adjustments occurred.
Of the total
estimated purchase price paid at the time of acquisition, approximately $22.9
million has been allocated to goodwill. Goodwill represents the excess of the
purchase price of an acquired business over the fair value of the underlying net
tangible and intangible assets and is not deductible for tax purposes. Among the
factors that contributed to a purchase price in excess of the fair value of the
net tangible and intangible assets was the acquisition of an assembled workforce
of experienced semiconductor engineers, synergies in products, technologies,
skillsets, operations, customer base and organizational cultures that can be
leveraged to enable the Company to build an enterprise greater than the sum of
its parts. In accordance with ASC 350 Intangibles – Goodwill and Other, goodwill
will not be amortized but instead will be tested for impairment at least
annually and more frequently if certain indicators of impairment are present. In
the event that management determines that the value of goodwill has become
impaired, the Company will record an expense for the amount impaired during the
fiscal quarter in which the determination is made.
In connection
with the acquisition of RMI, the Company entered into non-competition agreements
with certain employees of RMI with a value of approximately $0.4
million. These non-competition agreements were negotiated as part of
the acquisition, and as such, the fair value of these agreements is accounted
for as a transaction separate from the business
combination. Non-competition agreements are valued by determining the
difference in net future cash flows with and without the covenant not to
compete. The Company is amortizing the assets on a straight-line
basis over an estimated life of 2.5 years.
Prior to the
close of the acquisition, RMI initiated a restructuring plan where the
employment of some RMI employees were terminated upon the close of the
merger. The Company has determined that the restructuring plan was a
separate plan from the business combination because the plan to terminate
the employment of certain employees was in contemplation of the merger.
Therefore, the full severance cost of $0.9 million was recognized by the
Company as an expense on the acquisition date. The severance
costs were comprised of $0.4 million, which was paid by RMI to the terminated
employees prior to the close, and $0.5 million which was paid after the merger
by the Company.
Integrated
Device Technology, Inc., Network Search Engine Business
On
July 17, 2009, the Company purchased intellectual property and other assets
relating to the network search engine business of IDT, which is referred to
as the “IDT NSE Acquisition”, for $98.2 million in cash, net of a price
adjustment based on a determination of the actual amount of inventory received,
pursuant to an Asset Purchase Agreement dated April 30, 2009. The Company
acquired the IDT NSE Assets to further expand its existing portfolio of
knowledge-based processors and, NETLite processors and network search engines,
and to further strengthen the relationships with its customer
base.
Allocation
of Consideration Transferred
The
acquisition was accounted for as a business combination under ASC 805 Business
Combinations. The estimated total purchase price of $98.2 million was allocated
to the net tangible and intangible assets based on their fair values as of the
date of the completion of the acquisition as follows (in
thousands):
|
Inventory
|
$ | 13,256 | ||
|
Composite
intangible assets
|
62,800 | |||
|
Supply
agreement
|
872 | |||
|
Goodwill
|
21,253 | |||
|
Total
|
$ | 98,181 |
As of the
effective date of the acquisition, inventories are required to be measured at
fair value. The fair value of inventory of $13.3 million was based on
assumptions applied to the IDT NSE inventory acquired. In estimating the fair
value of inventory, the Company made assumptions about projected selling prices
and the remaining selling and manufacturing efforts associated with the
inventory.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
In
conjunction with the IDT NSE Acquisition, the Company entered into a supply
agreement with IDT. The supply agreement allows the Company to source certain
finished products from IDT generally at its cost for a contracted period of
time. IDT's pricing to the Company was considered to be below market price in
most cases. Accordingly, the Company recorded an asset upon the
signing of the agreement representing the difference between IDT prices and
estimated market prices for those products based on quantities they currently
estimate they will purchase under the supply agreement. The Company
will amortize the asset associated with the supply agreement and
increase its inventory carrying value as products are purchased under the
supply agreement.
Composite
intangible assets consist of products which have reached technological
feasibility and include search accelerator, network search engine and route
accelerator product families. The value of the developed technology was
determined by discounting estimated net future cash flows of these products.
Composite intangible assets consisted of acquired IDT existing technology and
customer relationships. Because no future products were planned in the business
acquired, and market participants would continue to sell products solely under
existing relationships until the products are obsolete, both components of the
asset are deemed to have the same useful lives and are treated as a composite
asset. There are six composite assets, each represented by a product line with
its own fair value supported by an underlying cashflow projection. Their
respective useful lives of two to nine years are based on the period of
remaining significant cashflow streams by product. The Company is amortizing
these composite intangible assets on a straight-line basis over the respective
estimated lives. Amortization of composite intangible assets has been included
in cost of revenue.
Of the total
estimated purchase price paid at the time of acquisition, approximately $21.3
million has been allocated to goodwill. Goodwill represents the excess of the
purchase price of an acquired business over the fair value of the underlying net
tangible and intangible assets and which is deductible for tax purposes in
tax jurisdictions which the Company pays taxes. Among the factors that
contributed to a purchase price in excess of the fair value of the net tangible
and intangible assets were expected benefits from economies of scale by
combining the IDT NSE assets with the Company’s business. In accordance
with ASC 350 Intangibles – Goodwill and Other, goodwill will not be amortized
but instead will be tested for impairment at least annually and more frequently
if certain indicators of impairment are present. In the event that management
determines that the value of goodwill has become impaired, the Company will
record an impairment charge during the fiscal quarter in which the determination
is made.
The amount of
revenue included in the Company’s condensed consolidated statement of operations
from the IDT NSE and RMI acquisition dates to December 31, 2009 was
approximately $30.7 million.
Pro Forma
Data for IDT NSE and RMI Acquisitions
The following
table presents the unaudited pro forma results of the Company as though the IDT
NSE and RMI acquisitions described above occurred at the beginning of the
periods indicated. The data below includes the historical results of the Company
and each of these acquisitions on a standalone basis through its respective
closing date of acquisitions. Such historical results included
acquisition-related costs totaling $2.0 million recorded by RMI in 2009, as well
as restructuring and impairment charges totaling $3.1 million during the fiscal
year ended March 29, 2009 and $2.4 million during the six months ended June 28,
2009 recorded by IDT prior to the Company's acquisition of the NSE
business. Adjustments have been made for the estimated fair value
adjustment related to acquired inventory, amortization of intangible assets, and
the related income tax impact of the pro forma adjustments. No adjustments were
made to interest and related expenses associated with debt financing of these
acquisitions or the change in contingent earn-out liability recorded by the
Company in 2009. The pro forma information presented does not purport
to be indicative of the results that would have been achieved had both
acquisitions been made as of those dates nor of the results which may occur in
the future.
|
Year
ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Revenue
|
$ | 257,990 | $ | 282,464 | ||||
|
Net
loss
|
(111,391 | ) | (81,278 | ) | ||||
|
Net
loss per share - basic and diluted
|
(4.06 | ) | (3.05 | ) | ||||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Fiscal
2007:
Aeluros,
Inc.
In
October 2007, the Company acquired all outstanding equity securities of
Aeluros, Inc. (“Aeluros”) a privately-held, fabless provider of industry-leading
10-Gigabit Ethernet physical layer products (“PLPs”). The PLP family extended
the Company’s product offerings to the physical layer, or Layer 1, of the Open
Systems Interconnection (“OSI”) reference model, which is a layered abstract
description for communications and computer network protocol design developed as
part of the Open Systems Interconnection initiative. The physical layer provides
the physical and electrical means for transmitting data between different nodes
on a network. At the closing date, the Company paid $57.1 million in cash.
During the fourth quarter of fiscal 2008, the Company became obligated to pay an
additional $15.5 million in cash to the former Aeluros stockholders due to our
attainment of post-acquisition revenue milestones, subject to certain
adjustments as provided in the Aeluros acquisition agreement. The results of
operations relating to Aeluros have been included in the Company’s results of
operations since the acquisition date.
The purchase
price of Aeluros, including the additional $15.5 million earn-out based on the
attainment of post-acquisition revenue milestones, was determined as follows (in
thousands):
|
Cash
|
$ | 71,903 | ||
|
Direct
transaction costs
|
697 | |||
|
Total
purchase price
|
$ | 72,600 |
Under the
purchase method of accounting, the total purchase price (including the
additional purchase price allocation adjustments recorded during the year ended
December 31, 2008) was allocated to net tangible and intangible assets acquired
based on their estimated fair values as follows (in thousands):
|
Net
tangible assets
|
$ | 5,181 | ||
|
Developed
technology
|
27,680 | |||
|
Patents
and core technology
|
5,590 | |||
|
Customer
relationships
|
6,900 | |||
|
Backlog
|
970 | |||
|
In-process
research and development
|
1,610 | |||
|
Goodwill
|
31,645 | |||
|
Deferred
tax asset
|
10,076 | |||
|
Deferred
tax liabilities
|
(17,052 | ) | ||
|
Total
purchase price
|
$ | 72,600 |
Developed
technology consisted of products which have reached technological feasibility
and shipped in volume to customers. The value of the developed technology
was determined by discounting estimated net future cash flows of the
products. The Company is amortizing the existing technology for the chip
technology on a straight-line basis over estimated lives of four to five
years.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Patents and
core technology represent a combination of processes, patents and trade secrets
developed though years of experience in design and development of the
products. The value of the patents and core technology was determined by
estimating a benefit from owning the intangible asset rather than paying a
royalty to a third party for the use of the asset. The Company are
amortizing the core technology on a straight-line basis over an estimated life
of five years.
Customer
relationships relate to the Company’s ability to sell existing, in process and
future versions of its products to the existing customers of Aeluros. The value
of the customer relationships was determined by discounting estimated net future
cash flows from the customer contracts. The Company is amortizing customer
relationships on a straight-line basis over an estimated life of five
years.
The backlog
intangible asset represents the value of the sales and marketing costs required
to establish the order backlog and was valued using the cost savings approach.
The Company estimated these orders to be delivered and billed within three
months, over which the asset was amortized. As of December 31, 2007,
the orders had been delivered and billed and the backlog intangible asset had
been fully amortized.
Of the total
estimated purchase price, approximately $1.6 million has been allocated to IPRD
based upon management’s estimate of the fair values of assets acquired and was
charged to expense in the three months ended December 31, 2007. Projects
that qualify as IPRD represent those that have not reached technological
feasibility and which have no alternative use and therefore were written-off
immediately.
The value
assigned to IPRD was determined by considering the importance of products under
development to the overall development plan, estimating costs to develop the
purchased IPRD into commercially viable products, estimating the resulting net
cash flows from the projects when completed and discounting the net cash flows
to their present value. The fair values of IPRD were determined using the
income approach, which discounts expected future cash flows to present
value. The discount rate of 24% used in the present value calculations was
derived from a weighted-average cost of capital analysis, adjusted to reflect
additional risks related to the product’s development and success as well as the
product’s stage of completion. At the time of the acquisition, the Company
estimated that the aggregate costs to complete the projects would be $0.3
million. The projects were completed during the year ended December 31,
2008.
Of the total
estimated purchase price paid, including the $15.5 million due to the attainment
of post-acquisition revenue milestones, approximately $31.6 million has
been allocated to goodwill. Goodwill represents the excess of the purchase
price of an acquired business over the fair value of the underlying net tangible
and intangible assets, and is not deductible for tax purposes. Among the factors
that contributed to a purchase price in excess of the fair value of the net
tangible and intangible assets was the acquisition of an assembled workforce of
experienced semiconductor engineers. The Company expects these experienced
engineers to provide the capability of developing and integrating advanced
interface technology into its next generation products.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
TCAM2
Assets Purchase
In
August 2007, the Company purchased the TCAM2 and TCAM2-CR network search
engine products (collectively, the “TCAM2 Products”) and certain related assets
from Cypress for a total cash purchase price of approximately $14.6 million,
which was determined as follows (in thousands):
|
Cash
|
$ | 14,448 | ||
|
Direct
transaction costs
|
188 | |||
|
Total
purchase price
|
$ | 14,636 |
The
acquisition was accounted for as an asset purchase transaction and the total
purchase price was allocated to the TCAM2 Products’ net tangible and intangible
assets based on their fair values as of the date of the completion of the
acquisition. Based on the Company's management estimates of the fair
values, the estimated purchase price was allocated as follows (in
thousands):
|
Inventory
|
$ | 3,090 | ||
|
Backlog
|
300 | |||
|
Composite
intangible asset
|
11,246 | |||
|
Total
|
$ | 14,636 |
The composite
intangible asset consisted of the existing technology related to the TCAM2
Products and a customer relationship with Cisco, who is the sole customer for
the TCAM2 Products. On the acquisition date, there was no active research and
development in process on the TCAM2 Products and therefore, no IPRD was
identified. The value assigned to the composite intangible asset was based upon
future discounted cash flows related to the TCAM2 Products’ projected income
streams. Factors considered in estimating the discounted cash flows to be
derived from the existing technology included risks related to the
characteristics and applications of the technology, existing and future markets
and an assessment of the age of the technology within its life span. The Company
is amortizing the composite intangible asset on a straight-line basis over an
estimated life of four years.
The backlog
intangible asset represented the value of the sales and marketing costs required
to establish the order backlog and was valued using the discounted cash flow
method. The Company estimated those orders would be delivered and billed within
four months from the acquisition date, which is the period over which the asset
was amortized. As of December 31, 2007, the orders had been delivered and billed
and the backlog intangible asset had been fully amortized.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
3—Goodwill and Other Intangible Assets
The following
table summarizes the activity related to the carrying value of our goodwill
during the years ended December 31, 2009 and 2008 (in
thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning
balance
|
$ | 68,712 | $ | 55,422 | ||||
|
Aeluros
acquisition earn-out
|
- | 15,501 | ||||||
|
IDT
NSE acquisition
|
21,253 | - | ||||||
|
RMI
Corp acquisition
|
22,922 | - | ||||||
|
Other
adjustments
|
31 | (2,211 | ) | |||||
|
Ending
balance
|
$ | 112,918 | $ | 68,712 | ||||
The following
table summarizes the components of other intangible assets and related
accumulated amortization balances, which were recorded as a result of prior
business combinations (in thousands):
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||||||||||||
|
Other
intangible assets:
|
||||||||||||||||||||||||
|
Developed
technology
|
$ | 36,880 | $ | (19,821 | ) | $ | 17,059 | $ | 34,180 | $ | (11,668 | ) | $ | 22,512 | ||||||||||
|
Composite
intangible asset
|
74,046 | (10,560 | ) | 63,486 | 11,246 | (3,749 | ) | 7,497 | ||||||||||||||||
|
Patents
and
core
technology
|
77,390 | (5,159 | ) | 72,231 | 5,590 | (1,325 | ) | 4,265 | ||||||||||||||||
|
Customer
relationships
|
20,700 | (3,246 | ) | 17,454 | 6,900 | (1,636 | ) | 5,264 | ||||||||||||||||
|
Tradenames
and trademarks
|
2,200 | (122 | ) | 2,078 | - | - | - | |||||||||||||||||
|
Non-competition
agreements
|
400 | (27 | ) | 373 | - | - | - | |||||||||||||||||
|
Intellectual
property licenses
|
3,472 | (88 | ) | 3,384 | - | - | - | |||||||||||||||||
|
Other
intangible assets
|
256 | (103 | ) | 153 | - | - | - | |||||||||||||||||
|
Supply
agreement
|
872 | (245 | ) | 627 | - | - | - | |||||||||||||||||
|
In-process
research
and
development
|
46,500 | - | 46,500 | - | - | - | ||||||||||||||||||
|
Total
|
$ | 262,716 | $ | (39,371 | ) | $ | 223,345 | $ | 57,916 | $ | (18,378 | ) | $ | 39,538 | ||||||||||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
The following
table presents details of the amortization of intangible assets included in the
cost of revenue and operating expenses categories for the years ended
December 31, 2009, 2008 and 2007 (thousands):
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
of revenue
|
$ | 18,865 | $ | 11,919 | $ | 4,955 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Selling,
general and administrative
|
1,759 | 1,380 | 256 | |||||||||
As of
December 31, 2009, the estimated future amortization expense of intangible
assets in the table above is as follows, excluding in-process research and
development intangible asset (in thousands):
|
Fiscal
Year Ending
|
Estimated
Amortization
|
|||
|
2010
|
$ | 42,960 | ||
|
2011
|
38,835 | |||
|
2012
|
30,715 | |||
|
2013
|
24,273 | |||
|
2014
|
11,330 | |||
|
Thereafter
|
28,732 | |||
|
Total
|
$ | 176,845 | ||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
4—BALANCE SHEET COMPONENTS:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Accounts
receivables:
|
||||||||
|
Trade
accounts receivables
|
$ | 25,396 | $ | 8,450 | ||||
|
Less:
Allowance for doubtful accounts and customer returns
|
(259 | ) | (68 | ) | ||||
| $ | 25,137 | $ | 8,382 | |||||
|
Inventories:
|
||||||||
|
Finished
goods
|
$ | 18,147 | $ | 8,170 | ||||
|
Work-in-progress
|
26,966 | 5,537 | ||||||
| $ | 45,113 | $ | 13,707 | |||||
|
Property
and equipment, net:
|
||||||||
|
Machinery
and equipment
|
$ | 9,352 | $ | 6,097 | ||||
|
Software
|
19,779 | 11,249 | ||||||
|
Furniture
and fixtures
|
393 | 270 | ||||||
|
Leasehold
improvements
|
292 | 199 | ||||||
| 29,816 | 17,815 | |||||||
|
Less:
Accumulated depreciation and amortization
|
(16,538 | ) | (12,302 | ) | ||||
| $ | 13,278 | $ | 5,513 | |||||
|
Other
assets:
|
||||||||
|
Deferred
tax assets, noncurrent
|
$ | 44,014 | $ | 8,047 | ||||
|
Long-term
investments
|
1,500 | - | ||||||
|
Other
assets
|
733 | 177 | ||||||
| $ | 46,247 | $ | 8,224 | |||||
Depreciation
and amortization expense related to property and equipment for the years ended
December 31, 2009, 2008 and 2007 was $4.3 million, $3.9 million, and
$3.8 million, respectively.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
The following
table summarizes the activity related to accrued liabilities during the years
ended December 31, 2009 and 2008 (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accrued
Liabilities:
|
||||||||
|
Accrued
payroll and related expenses
|
$ | 11,335 | $ | 4,784 | ||||
|
Accrued
inventory purchases
|
10,148 | 729 | ||||||
|
Accrued
warranty
|
1,534 | 1,445 | ||||||
|
Accrual
for Aeluros earn-out based on post-acquisition revenue
milestone
(refer
to Note 2, Business Combinations and Asset Purchase)
|
- | 15,501 | ||||||
|
Other
accrued expenses
|
11,188 | 3,461 | ||||||
| $ | 34,205 | $ | 25,920 | |||||
The following
table summarizes the activity related to the product warranty liability during
the years ended December 31, 2009 and 2008 (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Warranty
accrual:
|
||||||||
|
Beginning
balance
|
$ | 1,445 | $ | 1,512 | ||||
|
Provision
for warranty
|
294 | 946 | ||||||
|
Settlements
made during the period
|
(205 | ) | (1,013 | ) | ||||
|
Ending
balance
|
$ | 1,534 | $ | 1,445 | ||||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
5—COMMON STOCK:
The Company’s
restated certificate of incorporation authorizes it to issue 200,000,000
shares of $0.01 par value Common Stock. A portion of the shares sold are subject
to a right of repurchase by the Company subject to vesting, which is generally
over a four year period from the earlier of grant date or employee hire date, as
applicable, until vesting is complete. At December 31, 2009 there were no
shares subject to such a right to repurchase.
Warrants
for common stock
At
December 31, 2009, there were no outstanding warrants.
Stockholder
rights plan
The Company
adopted a stockholder rights plan that generally entitles its stockholders to
rights to acquire additional shares of the common stock when a third party
acquires 15.0% of the Company's common stock or commences or announces
its intent to commence a tender offer for at least 15.0% of the common
stock, other than for certain stockholders that were stockholders prior
to the Company's initial public offering as to whom this threshold is
20.0%. This plan could delay, deter or prevent an investor from acquiring the
Company in a transaction that could otherwise result in its stockholders
receiving a premium over the market price for their shares of common
stock.
Significant
Equity Transactions
In December
2009, the Company entered into a Purchase Agreement with an asset management
firm, providing for the sale and issuance of a total of 700,400 shares of its
common stock. Pursuant to the Purchase Agreement, the asset management firm
agreed on behalf of a group of customers for which it acted as investment
manager to purchase, and the Company agreed to sell and issue, the shares at a
purchase price per share of $42.25 according to the allocation specified in the
Purchase Agreement. The sale closed on December 23, 2009, and the
Company received net proceeds of $29.7 million, after deducting offering
expenses of approximately $0.1 million.
In connection
with the acquisition of RMI, the Company delivered merger consideration of
approximately 5.0 million shares of it common stock to the paying agent for
distribution to the holders of RMI capital stock. Approximately 10% of the
shares of the Company’s common stock are being held in escrow as security for
claims and expenses that might arise during the first 12 months following the
closing date. The closing price of a share of the Company’s common stock on
October 30, 2009 was $38.01. The Company may be required to issue up to an
additional 1.6 million shares of its common stock (plus cash, refer to Note
2 Business Combinations and Asset Purchase) to the former holders of RMI capital
stock as earn-out consideration based upon achievement of specified percentages
of revenue targets for either the 12-month period from October 1, 2009 through
September 30, 2010, or the 12-month period from November 1, 2009 through October
31, 2010, whichever period results in the higher percentage of the revenue
target. The additional earn-out consideration, if any, net of applicable
indemnity claims, will be paid on or before December 31,
2010. Additionally, in connection with the merger, and pursuant to
NASDAQ Listing Rule 5635(a), the Company granted from its total authorized
shares, and not pursuant to a pre-existing stock plan, restricted stock units
representing the right to acquire a total of 1,236,081 shares of common stock
and stock options for the purchase of a total of 682,523 shares of common stock
options to those employees of RMI who continued as employees of the Company or
one of its subsidiaries.
Registration
Statements
The Company
has an effective shelf registration statement on SEC Form S-3 that will not
expire until 2012. This registration statement on Form S-3 permits the
Company to sell, in one or more public offerings, shares of its common
stock, shares of preferred stock or debt securities, or any
combination of such securities, for proceeds in an aggregate amount of up to
$120 million. To date no securities have been issued pursuant to this
registration statement.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
6—STOCK OPTION PLANS:
The Company’s
2004 Equity Incentive Plan and the 2000 Stock Plan (collectively, the “Plans”)
provide for the granting of stock options to employees, directors and
consultants. Options granted under the Plans may be either incentive stock
options or nonqualified stock options. Incentive stock options (“ISO”) may be
granted only to the Company’s employees (including officers and directors who
are also employees). Nonqualified stock options (“NSO”) may be granted to our
employees, non-employee directors and consultants. The Company no longer
grants options under the 2000 Stock Plan. A total of 6,273,191 shares of common
stock have been reserved for awards issuable under the 2004 Equity Incentive
Plan, which further provides for an annual increase of 150,000 shares on each
January 1. At December 31, 2009, 466,098 shares were available for
grant.
Options under
the Plans may be granted for periods of up to ten years. Under the Plans, the
exercise price of (i) an ISO shall not be less than 100% of the estimated
fair value of the shares on the date of grant, and (ii) an ISO granted to a
10% stockholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant. The exercise price of an NSO under the 2004 Plan
may be any price as determined by the board of directors. Options granted under
the 2000 Stock Plan were exercisable immediately subject to repurchase options
held by the Company which lapse over a maximum period of five years at such
times and under such conditions as determined by the board of
directors.
The 2004 Plan
also allows for the grant of restricted common stock. During 2007 and 2006, the
Board of Directors granted 475,000 and 217,000 shares of restricted common stock
to certain employees. No shares of restricted common stock were granted in 2009
and 2008. The Company measured compensation expense for restricted stock granted
during the year ended December 31, 2007 based on the fair value of the
common stock on the date of grant. The Company recognizes such compensation
expense over the vesting period of 2 to 4 years.
In
conjunction with the Aeluros acquisition in October 2007, the Company assumed
Aeluros’ 2001 Stock Option/Stock Issuance Plan (the “Aeluros Plan”), and
reserved 104,000 shares of common stock under the Aeluros Plan for issuance upon
exercise of assumed outstanding options. The related options are included in the
table below. The options vest over four to five years and have eight to ten year
terms. The Company no longer grants options under the Aeluros Plan.
In January
2008 the Company adopted the 2008 New Employee Inducement Incentive Plan (the
“2008 Plan”) and reserved 250,000 shares of common stock under the 2008 Plan for
the granting of non-statutory stock options and restricted units to retain the
services of new employees and directors, or following a bona fide period of
non-employment, as an inducement material to the individual’s entering
employment with the Company within the meaning of Rule 5635(c)(4) (formerly
Rule 4350(i)(l)(A)(iv)) of the Nasdaq Marketplace Rules. In July 2009, the
Company increased the reserve of shares issuable under the 2008 Plan by 250,000
shares. At December 31, 2009, 192,799 shares were available for
grant.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
A summary of
all options activity under the Plans is presented below (number of shares in
thousands):
|
Options
Outstanding
|
||||||||
|
Number
of
Shares
Outstanding
|
Weighted
Average
Exercise
Price
|
|||||||
|
Balance
at December 31, 2006
|
3,804 | $ | 17.70 | |||||
|
Options
granted and acquisition-related assumed options
|
1,951 | 27.83 | ||||||
|
Options
exercised
|
(762 | ) | 11.94 | |||||
|
Options
forfeited or expired
|
(351 | ) | 24.37 | |||||
|
Balance
at December 31, 2007
|
4,642 | 22.40 | ||||||
|
Options
granted
|
417 | 28.64 | ||||||
|
Options
exercised
|
(497 | ) | 14.64 | |||||
|
Options
forfeited or expired
|
(389 | ) | 28.37 | |||||
|
Balance
at December 31, 2008
|
4,173 | 23.38 | ||||||
|
Options
granted
|
311 | 24.92 | ||||||
|
Options
granted - RMI
|
683 | 38.32 | ||||||
|
Options
exercised
|
(782 | ) | 19.84 | |||||
|
Options
forfeited or expired
|
(49 | ) | 29.53 | |||||
|
Balance
at December 31, 2009
|
4,336 | $ | 26.42 | |||||
The following
table summarizes information about options granted and outstanding under the
Plans at December 31, 2009 (number of shares in thousands):
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
(in
years)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Exercisable
|
Weighted
Average
Exercise
Price
|
Aggregate
Instrinsic
Value
|
|||||||||||||||||||||||
| $ | 0.80-$13.00 | 617 | 4.49 | $ | 8.96 | $ | 23,015 | 605 | $ | 9.08 | $ | 22,494 | ||||||||||||||||||
| $ | 13.26-$21.41 | 571 | 6.22 | $ | 19.76 | 15,129 | 495 | $ | 19.72 | 13,137 | ||||||||||||||||||||
| $ | 21.42-$23.94 | 646 | 7.75 | $ | 23.00 | 15,027 | 293 | $ | 23.59 | 6,642 | ||||||||||||||||||||
| $ | 24.45-$29.49 | 546 | 7.28 | $ | 27.40 | 10,300 | 293 | $ | 27.10 | 5,614 | ||||||||||||||||||||
| $ | 29.60-$31.46 | 658 | 7.62 | $ | 30.74 | 10,214 | 265 | $ | 30.72 | 4,118 | ||||||||||||||||||||
| $ | 31.50-$37.82 | 554 | 7.04 | $ | 34.46 | 6,537 | 431 | $ | 34.53 | 5,056 | ||||||||||||||||||||
| $ | 38.32-$38.32 | 683 | 9.84 | $ | 38.32 | 5,423 | - | $ | - | - | ||||||||||||||||||||
| $ | 39.33-$40.96 | 61 | 9.11 | $ | 39.54 | 409 | 32 | $ | 39.56 | 214 | ||||||||||||||||||||
| $ | 0.80-$40.96 | 4,336 | 7.27 | $ | 26.41 | $ | 86,054 | 2,414 | $ | 22.53 | $ | 57,276 | ||||||||||||||||||
The aggregate
intrinsic value in the table above is based on the Company’s closing stock price
of $46.26 as of December 31, 2009, which would have been received by the
option holders had all option holders exercised their in the money options as of
that date. The weighted average remaining contractual term of options
exercisable at December 31, 2009 was approximately 7.27 years.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
As of
December 31, 2009, there was approximately $24.9 million of total
unrecognized compensation cost related to unvested stock options granted and
outstanding with a weighted average remaining vesting period of 2.9
years.
The total
intrinsic value of options exercised during the years ended December 31,
2009, 2008 and 2007 were as follows (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Total
intrinsic value of options exercised
|
$ | 15,560 | $ | 9,023 | $ | 13,209 | ||||||
The Company’s
non-vested stock awards consists of restricted stock awards, restricted stock
units, and performance-based restricted stock units. A summary of
non-vested stock awards activity during the year ended December 31, 2009 is
presented below (number of shares in thousands):
|
Shares
|
Weighted-Average
Grant
Date
Fair
Value
|
|||||||
|
Non-vested
stock awards at December 31, 2006
|
192 | $ | 35.38 | |||||
|
Granted
|
475 | 31.51 | ||||||
|
Vested
|
(159 | ) | 33.96 | |||||
|
Forfeited
|
(11 | ) | 33.60 | |||||
|
Non-vested
stock awards at December 31, 2007
|
497 | 34.21 | ||||||
|
Granted
|
585 | 26.94 | ||||||
|
Vested
|
(139 | ) | 24.19 | |||||
|
Forfeited
|
(115 | ) | 28.19 | |||||
|
Non-vested
stock awards at December 31, 2008
|
828 | 27.66 | ||||||
|
Granted
|
749 | 35.88 | ||||||
|
Granted
- RMI
|
1,236 | 40.07 | ||||||
|
Vested
|
(229 | ) | 30.82 | |||||
|
Forfeited
|
(34 | ) | 33.04 | |||||
|
Nonvested
stock awards at December 31, 2009
|
2,550 | $ | 35.73 | |||||
The fair
value of the Company’s non-vested stock awards is calculated based upon the fair
market value of the Company’s stock at the date of grant. As of
December 31, 2009, there was $61.7 million of total unrecognized
compensation cost related to nonvested stock awards granted, which is expected
to be recognized over a weighted average period 2.2 years. The total fair value
of stock awards that vested during the years ended December 31, 2009, 2008, and
2007, was $7.1 million, $3.4 million, and $2.4 million,
respectively.
Performance-Based
Restricted Stock Units. During the fourth
quarter of 2007, in connection with the Aeluros acquisition the Company entered
into performance-based restricted stock unit award agreements with certain
former Aeluros employees. During the year ended December 31, 2008, the Company
modified the vesting conditions of 15,500 shares of performance-based restricted
stock units and reversed $199,000 of stock-based compensation that had been
recognized previously.
2004
Employee Stock Purchase Plan
In July 2004,
the Company adopted the 2004 employee stock purchase plan, or ESPP, which
complies with the requirements of Section 423 of the Internal Revenue Code.
The shares reserved under the 2004 ESPP are subject to an automatic increase on
January 1 of each year equal to the lesser of 75,000 shares or 0.5% of the
outstanding shares of the Company’s common stock at the end of the preceding
fiscal year. The 2004 ESPP permits eligible employees (as defined in the plan)
to purchase up to $25,000 worth of the Company’s common stock annually over the
course of two six-month offering periods, other than the initial two-year
offering period which commenced on July 8, 2004. The purchase price to be
paid by participants is 85% of the price per share of the Company’s common stock
either at the beginning or the end of each six-month offering period, whichever
is less. At the Company’s 2006 Annual Meeting of Stockholders held on
May 18, 2006, its stockholders approved the reduction in the number of
shares reserved under the 2004 ESPP by 700,000 shares, and the transfer of those
reserved shares to their 2004 Equity Incentive Plan. During the year ended
December 31, 2009, 2008 and 2007, approximately 66,000 shares, 53,000
shares, 44,000 shares, respectively, were issued under the Purchase Plan, and
approximately 161,000 shares remain available for future issuance at
December 31, 2009. The 2004 ESPP terminates in May 2014.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Stock-Based
Compensation Expense
On
January 1, 2006, the Company adopted ASC 718, on the modified prospective
application method, which requires the measurement and recognition of
compensation expense for all share-based awards made to its employees and
directors including employee stock options and employee stock purchases
outstanding as of and awarded after January 1, 2006. The total stock-based
compensation expense recognized for the years ended December 31, 2009, 2008
and 2007 was allocated as follows (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
of revenue
|
$ | 672 | $ | 1,030 | $ | 747 | ||||||
|
Research
and development
|
21,527 | 9,474 | 9,933 | |||||||||
|
Selling,
general and administrative
|
18,556 | 5,988 | 5,366 | |||||||||
|
Total
stock-based compensation expense
|
$ | 40,755 | $ | 16,492 | $ | 16,046 | ||||||
In addition,
the Company capitalized approximately $0.1 million and $0.2 million of
stock-based compensation in inventory as of December 31, 2009 and 2008,
respectively, which represented indirect manufacturing costs related to its
inventory.
Valuation
Assumptions
For the years
ended December 31, 2009, 2008, and 2007 the fair value of stock options
including options assumed in connection with the Aeluros acquisition, and
granted under the Plans, were estimated at the date of grant (or date of
acquisition for options assumed) with the following weighted-average
assumptions:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Stock
Option Plans:
|
||||||||||||
|
Risk-free
interest rate
|
2.22 | % | 3.12 | % | 4.58 | % | ||||||
|
Expected
life of options (in years)
|
5.65 | 5.43 | 4.90 | |||||||||
|
Expected
dividend yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Volatility
|
55 | % | 58 | % | 57 | % | ||||||
|
Weighted
average fair value
|
$ | 17.60 | $ | 15.45 | $ | 15.46 | ||||||
|
Employee
Stock Purchase Plan:
|
||||||||||||
|
Risk-free
interest rate
|
0.30 | % | 2.74 | % | 5.06 | % | ||||||
|
Expected
life of options (in years)
|
0.50 | 0.50 | 0.50 | |||||||||
|
Expected
dividend yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Volatility
|
67 | % | 53 | % | 57 | % | ||||||
|
Weighted
average fair value
|
$ | 9.13 | $ | 9.90 | $ | 8.38 | ||||||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
7—INCOME TAXES:
The
components of income before income (loss) taxes consisted of the following (in
thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Domestic
|
$ | (40,104 | ) | $ | (8,343 | ) | $ | (4,255 | ) | |||
|
Foreign
|
(10,118 | ) | 9,983 | 6,562 | ||||||||
|
Income
before income taxes
|
$ | (50,222 | ) | $ | 1,640 | $ | 2,307 | |||||
The
components of the benefit from income taxes are as follows (in
thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 3,484 | $ | 1,573 | $ | 13,511 | ||||||
|
State
|
(31 | ) | 559 | 17 | ||||||||
|
Foreign
|
190 | (176 | ) | 173 | ||||||||
|
Total
current
|
3,643 | 1,956 | 13,701 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(9,574 | ) | (2,895 | ) | (9,437 | ) | ||||||
|
State
|
2,871 | (998 | ) | (4,552 | ) | |||||||
|
Foreign
|
- | - | - | |||||||||
|
Total
deferred
|
(6,703 | ) | (3,893 | ) | (13,989 | ) | ||||||
|
Benefit
from income taxes
|
$ | (3,060 | ) | $ | (1,937 | ) | $ | (288 | ) | |||
The benefit
from income taxes differs from the amount computed by applying the U.S.
statutory federal rate to income (loss) before income tax provision as a result
of the following (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Tax
at statutory rate
|
$ | (17,577 | ) | $ | 574 | $ | 807 | |||||
|
State
taxes, net of federal benefit
|
2,772 | (635 | ) | 17 | ||||||||
|
Nondeductible
stock based compensation
|
3,268 | 1,673 | 1,837 | |||||||||
|
Change
in valuation allowance
|
- | - | (29,898 | ) | ||||||||
|
Foreign
rate differential
|
3,731 | (3,832 | ) | (2,111 | ) | |||||||
|
Research
and development credits
|
(1,289 | ) | (697 | ) | (746 | ) | ||||||
|
Intercompany
license agreement
|
3,932 | - | 28,140 | |||||||||
|
Nondeductible
acquisition related expenses
|
1,887 | - | - | |||||||||
|
Other
|
216 | 980 | 1,666 | |||||||||
|
Total
benefit for income taxes
|
$ | (3,060 | ) | $ | (1,937 | ) | $ | (288 | ) | |||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and the
amount used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities consist of the following (in
thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$ | 36,087 | $ | 1,195 | ||||
|
Accrued
liabilities and other
|
6,196 | 2,796 | ||||||
|
Deferred
stock-based compensation
|
8,560 | 5,585 | ||||||
|
Depreciation
and amortization
|
11,255 | 4,120 | ||||||
|
Research
and development tax credits
|
17,123 | 2,938 | ||||||
| 79,221 | 16,634 | |||||||
|
Valuation
allowance
|
(7,043 | ) | - | |||||
|
Total
deferred tax assets
|
72,178 | 16,634 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Acquired
intangible assets and other
|
(15,007 | ) | (5,371 | ) | ||||
|
Net
deferred tax assets
|
$ | 57,171 | $ | 11,263 | ||||
The following
table presents the breakdown between current and non-current net deferred tax
assets and liabilities (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
deferred tax assets
|
$ | 19,864 | $ | 3,217 | ||||
|
Current
deferred tax liabilities
|
(6,708 | ) | - | |||||
|
Non-current
deferred tax assets
|
64,470 | 13,417 | ||||||
|
Non-current
deferred tax liabilities
|
(20,455 | ) | (5,371 | ) | ||||
|
Net
deferred tax assets
|
$ | 57,171 | $ | 11,263 | ||||
As of
December 31, 2009 and 2008, the Company had a valuation allowance of
approximately $7.0 million and zero, respectively. In February 2009,
the California 2009-2010 budget legislature was enacted into law, allowing
companies to elect, for income tax purposes, to apply a single sales factor
apportionment for years beginning after January 1, 2011. Based upon
its anticipated election, the Company determined a need to establish a valuation
allowance on the deferred tax assets associated with its California research and
development tax credits, totaling $7.0 million at December 31, 2009, of which
$3.4 million was established during the first quarter of fiscal 2009 to record a
valuation allowance on the balance of deferred tax assets at the beginning of
the year.
The deferred
tax assets at December 31, 2009 exclude $4.1 million ($2.8 million at December
31, 2008) related to benefits of stock option deductions which, when recognized,
will be allocated directly to contributed capital.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
At
December 31, 2009, the Company had federal and state net operating loss
carryforwards of approximately $42.1 million and $117.6 million, respectively.
These federal and state net operating loss carryforwards will expire commencing
2019 and 2011, respectively. The Company also has federal and state research and
development tax credit carryforwards of approximately $12.4 million and $15.4
million, respectively. The federal tax credits carryforwards will expire
commencing in 2019 and California tax credits have no expiration
date.
For federal
and state purposes, a portion of the Company’s net operating loss carryforwards
and research and development credits will be subject to certain limitation on
annual utilization due to a change in ownership, as defined by federal and state
tax law.
Undistributed
earnings of the Company’s foreign subsidiaries of approximately $12.3 million at
December 31, 2009 are considered to be indefinitely reinvested and,
accordingly, no provisions for federal and state income taxes have been provided
thereon. The Company has calculated its indefinitely reinvested earnings on
an entity by entity basis, excluding entities with negative earnings. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to various foreign
countries. Determination of the amount of unrecognized deferred
income tax liability related to these earnings is not practicable.
The Company
adopted the accounting for uncertainty in tax positions provisions of ASC 740
effective on January 1, 2007. As a result of the implementation ASC 740,
the Company recognized no material adjustment to the liability for unrecognized
income tax benefits.
The following
table summarizes the activity related to the Company’s unrecognized tax benefits
(in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning
balance
|
$ | 16,492 | $ | 14,763 | ||||
|
Increase
related to current year tax positions
|
7,893 | 1,519 | ||||||
|
Increase
related to tax positions of prior years
|
24,900 | 210 | ||||||
|
Ending
balance
|
$ | 49,285 | $ | 16,492 | ||||
As of
December 31, 2009 and 2008, a total of $44.1 million and $15.2 million,
respectively, of the unrecognized tax benefits would affect the Company’s
effective tax rate if recognized.
The Company
recognizes interest and penalties related to uncertain tax positions in income
tax expense. As of December 31, 2009, 2008, and 2007, the Company had $0.4
million, $0.5 million, and zero of accrued interest and zero penalties related
to uncertain tax positions. The Company recognized a net interest benefit of
$0.1 million, $0.5 million, and zero during the years ended December 31, 2009,
2008, and 2007. The tax years 1997-2009 remain open to examination by
one or more of the major taxing jurisdictions to which the Company is subject to
tax on its taxable income. The Company does not anticipate that total
unrecognized tax benefits will significantly change within the next twelve
months.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
8—COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases
office space under non-cancelable operating leases with various expiration dates
through 2015. Rent expense for the years ended December 31, 2009, 2008 and
2007 was $1.5 million, $1.1 million and, $1.0 million, respectively. The terms
of certain facility lease provide for rental payments on a graduated scale.
The Company recognizes rent expense on a straight-line basis over the lease
period and accrues for rent expense incurred but not paid.
Future
minimum lease payments under noncancelable operating leases, which include
common area maintenance charges, are as follows (in thousands):
|
Year
Ending December 31,
|
Software
licenses
and
other
obligations
|
Operating
Leases
|
Total
|
|||||||||
|
2010
|
3,146 | 3,253 | 6,399 | |||||||||
|
2011
|
2,472 | 653 | 3,125 | |||||||||
|
2012
|
- | 149 | 149 | |||||||||
|
2013
|
- | 150 | 150 | |||||||||
|
2014
|
- | 164 | 164 | |||||||||
|
2015
and thereafter
|
- | 150 | 150 | |||||||||
| $ | 5,618 | $ | 4,519 | $ | 10,137 | |||||||
|
Less:
Interest component
|
(172 | ) | ||||||||||
|
Present
value of minimum lease payment
|
5,446 | |||||||||||
|
Less:
Current portion
|
(3,037 | ) | ||||||||||
|
Long-term
portion of obligations
|
$ | 2,409 | ||||||||||
The Company
has software license obligations that are paid over the license periods, which
range from one to three years. These software licenses are used for the
Company’s internal research and development projects. At December 31, 2009
and 2008, the Company had $5.4 million and $1.2 million of software license
obligations, respectively.
Purchase
Commitments
At
December 31, 2009, the Company had approximately $20.7 million in
non-cancelable purchase commitments with suppliers. The Company has recorded a
liability of $0.5 million for adverse purchase commitments related to a
portion of these commitments for which the inventory is considered
unsalable.
Contingencies
From time to
time the Company is party to claims and litigation proceedings arising in the
normal course of business. Currently, the Company does not believe that there
are any claims or litigation proceeds involving matters that will result in the
payment of monetary damages, net of any applicable insurance proceeds, that, in
the aggregate, would be material in relation to its business,
financial position, results of operations or cash flows. There can be no
assurance, however, that any such matters will be resolved without costly
litigation, in a manner that is not adverse to its business, financial position,
results of operations or cash flows, or without requiring royalty payments in
the future that may adversely impact gross margins.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
Indemnities,
Commitments and Guarantees
In the normal
course of business, the Company has made certain indemnities, commitments and
guarantees under which they may be required to make payments in relation to
certain transactions. These include agreements to indemnify the Company’s
customers with respect to liabilities associated with the infringement of other
parties’ technology based upon its products, obligation to indemnify its lessors
under facility lease agreements, and obligation to indemnify its directors and
officers to the maximum extent permitted under the laws of the state of
Delaware. The duration of such indemnification obligations, commitments and
guarantees varies and, in certain cases, is indefinite. The Company has not
recorded any liability for any such indemnification obligations, commitments and
guarantees in the accompanying balance sheets. The Company does, however,
accrue for losses for any known contingent liability, including those that may
arise from indemnification provisions, when future payment is estimable and
probable.
Under master
purchase agreements signed with Cisco in November 2005, the Company has agreed
to indemnify Cisco for costs incurred in rectifying epidemic failures, up to the
greater of (on a per claim basis) 25% of all amounts paid to the Company by
Cisco during the preceding 12 months (approximately $15.4 million at December
31, 2009) or $9.0 million, plus replacement costs. If the Company is required to
make payments under the indemnity, its operating results may be adversely
affected.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
9—SEGMENT INFORMATION:
The Company
operates as one operating and reportable segment and sells its products directly
to customers in North America, Asia and Europe. Sales for the geographic regions
reported below are based upon the bill-to customer headquarter locations.
Following is a summary of the geographic information related to revenues for the
years ended December 31, 2009, 2008 and 2007 (in thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue:
|
||||||||||||
|
United
States
|
$ | 43,920 | $ | 46,287 | $ | 48,221 | ||||||
|
Malaysia
|
54,379 | 42,435 | 34,017 | |||||||||
|
China
|
47,620 | 30,378 | 14,126 | |||||||||
|
Other
|
28,770 | 20,827 | 12,699 | |||||||||
|
Total
|
$ | 174,689 | $ | 139,927 | $ | 109,063 | ||||||
Substantially
all of the Company’s tangible assets are located in the United States of
America.
NOTE
10—EMPLOYEE BENEFIT PLAN:
The Company
sponsors a 401(k) defined contribution plan covering all employees.
Contributions made by the Company are determined annually by the Board
of Directors. To date the Company has not made any contributions
to the plan.
NOTE
11—RELATED PARTY:
The Company
leases its headquarters facility in Mountain View, California from an affiliate
of Berg & Berg Enterprises, LLC, which it believes holds shares
of the Company's common stock. During the year ended December 31,
2009, 2008 and 2007, the Company made lease payments of approximately
$1,029,000, $1,089,000, and $853,000, respectively, under this lease
arrangement.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
12 —CASH, CASH EQUIVALENTS, INVESTMENTS:
At December
31, 2009 the Company’s cash balance was $44.3 million and it did not have
any available-for-sale investments.
The following
is a summary of available-for-sale investments as of December 31, 2008 (in
thousands):
|
December
31, 2008
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gain
|
Gross
Unrealized
Loss
|
Estimated
Fair
Value
|
|||||||||||||
|
U.S.
government agency securities
|
$ | 16,413 | $ | 40 | $ | - | $ | 16,453 | ||||||||
|
Corporate
commercial paper
|
2,944 | 4 | - | 2,948 | ||||||||||||
|
Money
market funds
|
61,717 | - | - | 61,717 | ||||||||||||
|
Total
|
$ | 81,074 | $ | 44 | $ | - | $ | 81,118 | ||||||||
|
Reported
as:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 68,047 | $ | 4 | $ | - | $ | 68,051 | ||||||||
|
Short-term
investments
|
13,027 | 40 | - | 13,067 | ||||||||||||
|
Total
|
$ | 81,074 | $ | 44 | $ | - | $ | 81,118 | ||||||||
The fair
value of the Company’s investments at December 31, 2009 and 2008, by
contractual maturity, was as follows (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Due
in 1 year or less
|
$ | - | $ | 19,401 | ||||
|
Total
|
$ | - | $ | 19,401 | ||||
Net
unrealized holding gains and losses on available-for-sale investments are
included as a separate component of stockholders’ equity at December 31,
2008.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
13 - FAIR VALUE MEASUREMENTS:
ASC 820
defines fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which it would transact and consider assumptions that market participants
would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance.
Fair
Value Hierarchy
ASC 820
establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820 establishes three levels of inputs that may be
used to measure fair value:
Level 1 – Quoted prices in
active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs
to the valuation methodology that are significant to the measurement of fair
value of assets or liabilities.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The Company
measures its financial assets and financial liabilities, specifically cash
equivalents, short-term investments and contingent earn-out liability, at fair
value on a recurring basis. As of December 31, 2009, the Company’s cash balance
was $44.3 million, and it did not have cash equivalents or short-term
investments. The fair value of these financial assets and liabilities
was determined using the following inputs as of December 31, 2009 (in
thousands):
|
Fair
Value Measurements at December 31, 2009 Using
|
||||||||||||||||
|
Total
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Contingent
earn-out liability
|
$ | 11,687 | $ | - | $ | - | $ | 11,687 | ||||||||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
The fair
value of these financial assets was determined using the following inputs as of
December 31, 2008 (in thousands):
|
Fair
Value Measurements at December 31, 2008 Using
|
||||||||||||||||
|
Total
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Money
market funds (1)
|
$ | 61,717 | $ | 61,717 | $ | - | $ | - | ||||||||
|
U.S.
government agency securities (2)
|
16,453 | - | 16,453 | - | ||||||||||||
|
Corporate
commercial paper (3)
|
2,948 | - | 2,948 | - | ||||||||||||
|
Total
|
$ | 81,118 | $ | 61,717 | $ | 19,401 | $ | - | ||||||||
|
(1)
|
Included
in cash and cash equivalents on the Company’s consolidated balance
sheet.
|
|
(2)
|
$6.3
million of which is included in cash and cash equivalents and $10.1
million of which is included in short-term investments on the Company’s
consolidated balance sheet.
|
|
(3)
|
Included
in short-term investments on the Company’s consolidated balance
sheet.
|
Contingent
earn-out liability
The
Company estimated the fair value of the contingent earn-out liability based
on its probability assessment of RMI’s revenue achievements during the
earn-out period. In developing these estimates, the Company considered the
revenue projections of RMI management, RMI’s historical results, and general
macro-economic environment and industry trends. This fair value measurement is
based on significant revenue inputs not observed in the market and thus
represents a Level 3 measurement. Level 3 instruments are
valued based on unobservable inputs that are supported by little or no market
activity and reflect our own assumptions in measuring fair value. Any change in
the fair value of the contingent earn-out liability subsequent to the
acquisition date, including changes from events after the acquisition date, such
as changes in our estimate of the bookings targets, will be recognized in
earnings in the period the estimated fair value change. Therefore, the increase
in the Company’s fair value estimate described above in Note 2 resulted in an
adjustment to fair value measurement of $2.0 million for the year ended December
31, 2009.
The
following table represents a reconciliation of the change in the fair value
measurement of the contingent earn-out liability for the year ended December 31,
2009 and 2008:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning
balance
|
$ | - | $ | - | ||||
|
Acquisition
date fair value measurement
|
9,679 | - | ||||||
|
Adjustment
to fair value measurement
|
2,008 | - | ||||||
|
Ending
balance
|
$ | 11,687 | $ | - | ||||
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE
14 - CREDIT FACILITY:
On
June 19, 2009, the Company and its material subsidiaries entered into a
credit agreement with a group of lenders led by Silicon Valley Bank to provide
$55 million of new credit facilities for a term of three years. The credit
facilities consist of a $25.0 million senior secured revolving credit facility
and $30.0 million of senior secured term loans. The credit agreement is secured
by substantially all of the Company’s assets and the assets of its material
subsidiaries. The credit facilities can be prepaid (in whole or in part) and
terminated at any time without premium or penalty.
The net
proceeds of the senior secured term loans were used to finance a portion of the
IDT NSE Acquisition. In addition to the senior secured term loans,
during the year ended December 31, 2009, the Company drew $18.0 million from the
$25.0 million senior secured revolving credit facility to finance a portion of
the IDT NSE and RMI acquisitions. The Company may draw additional proceeds from
the senior secured revolving credit facility in the future for ongoing working
capital and other general corporate purposes. In December 2009, the
Company repaid the entire $30.0 million borrowed under the senior secured term
loans prior to maturity and repaid the $18.0 million borrowed under the senior
secured revolving credit facility. No amounts were outstanding under the senior
secured term loans and senior secured revolving credit facility as of December
31, 2009. The Company no longer has credit available under the senior secured
term loans facility.
Any
borrowings under the credit facility will, at the Company’s option, bear
interest either at an annual rate equal to (a) the higher of the Silicon
Valley Bank announced prime rate or the Federal Funds Effective Rate plus 0.50%
plus a margin ranging from 0.50% to 1.75% based on the ratio of the Company’s
reported total consolidated debt to their consolidated EBITDA, or
(b) Eurodollar borrowings based on the applicable LIBOR interest period
(with a LIBOR floor of 1.50%), plus a margin ranging from 3.00% to 4.00% based
on the ratio of their reported total consolidated debt to their consolidated
EBITDA. The revolving credit facility has an unused line fee payable on the
undrawn revolving credit facility amount set at a rate per annum ranging from
0.30% to 0.50% determined based on the ratio of the Company’s total consolidated
debt to their consolidated EBITDA.
Direct fees
and expenses totaling $1.1 million associated with the credit facility were
capitalized, and consisted of debt issuance costs of $0.8 million and debt
discount related to the senior secured term loans of $0.3 million. The Company
wrote-off debt issuance costs of $0.5 million in conjunction with the early
repayment of the principal of the senior secured term loans, and amortized
$0.2 million as of December 31, 2009. As of December 31, 2009,
the long-term portion of the debt issuance costs was $0.4 million, and is
reported within “Other assets” on the Consolidated Balance Sheet. The remaining
debt issuance costs related to the senior secured revolving credit
facility are being amortized using the straight line method over the
three-year term of the credit facility.
The senior
secured credit facility includes several financial covenants and customary
operating covenants, including the following:
|
•
|
a
covenant requiring the Company to maintain the ratio of their total
consolidated debt to their consolidated EBITDA within specified limits,
specifically (for the four trailing quarters ended on the applicable date)
2.25:1 (through March 31, 2010), 2.00:1 (from June 30, 2010 through
September 30, 2010) and 1.75:1
(thereafter);
|
|
•
|
a
minimum fixed charge covenant regarding the ratio of the Company’s
consolidated EBITDA less their capital expenditures to their consolidated
interest expense and other fixed charges to be no less than 1.25:1 at
quarter end;
|
|
•
|
a
minimum consolidated quick ratio covenant regarding the Company’s
consolidated cash and cash equivalents plus accounts receivable to their
consolidated current liabilities to be no less than 1:1 at quarter end;
and
|
|
•
|
a
covenant requiring the Company and their subsidiaries to maintain at all
times at least $20 million of unencumbered cash and cash
equivalents.
|
The Company
was in compliance with the debt covenants and had no outstanding liability under
the credit agreement as of December 31, 2009.
NETLOGIC
MICROSYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December
31, 2009
NOTE 15 –
SUBSEQUENT EVENT:
On
February 16, 2010, the Board of Directors approved a two-for-one stock
split of the Company’s common stock, to be effected pursuant to the issuance of
additional shares as a stock dividend. The stock dividend is payable on March
19, 2010 to stockholders of record as of March 5, 2010.
As of the
effective date of the stock split on March 19, 2010, pro forma per share data
for the last three fiscal years would be as follows (unaudited):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income (loss) per share - basic
|
||||||||||||
|
As
reported
|
$ | (2.04 | ) | $ | 0.17 | $ | 0.13 | |||||
|
Pro
forma for stock split
|
$ | (1.02 | ) | $ | 0.08 | $ | 0.06 | |||||
|
Net
income (loss) per share - diluted
|
||||||||||||
|
As
reported
|
$ | (2.04 | ) | $ | 0.16 | $ | 0.12 | |||||
|
Pro
forma for stock split
|
$ | (1.02 | ) | $ | 0.08 | $ | 0.06 | |||||
Quarterly pro
forma per share data would be as follows (unaudited):
|
Quarter
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Year
Ended December 31, 2009
|
||||||||||||||||
|
Net
income (loss) per share - basic and diluted
|
||||||||||||||||
|
As
reported
|
$ | (0.18 | ) | $ | (0.10 | ) | $ | (0.17 | ) | $ | (1.43 | ) | ||||
|
Pro
forma for stock split
|
$ | (0.09 | ) | $ | (0.05 | ) | $ | (0.09 | ) | $ | (0.72 | ) | ||||
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
Net
income (loss) per share - basic
|
||||||||||||||||
|
As
reported
|
$ | 0.05 | $ | 0.11 | $ | 0.06 | $ | (0.05 | ) | |||||||
|
Pro
forma for stock split
|
$ | 0.03 | $ | 0.05 | $ | 0.03 | $ | (0.03 | ) | |||||||
|
Net
income (loss) per share - diluted
|
||||||||||||||||
|
As
reported
|
$ | 0.05 | $ | 0.10 | $ | 0.06 | $ | (0.05 | ) | |||||||
|
Pro
forma for stock split
|
$ | 0.03 | $ | 0.05 | $ | 0.03 | $ | (0.03 | ) | |||||||
SUPPLEMENTARY
FINANCIAL DATA
Selected
Quarterly Financial Data (unaudited)
The following
table presents selected unaudited consolidated financial data for each of the
eight quarters in the two-year period ended December 31, 2009. In the
Company’s opinion, this unaudited information has been prepared on the same
basis as the audited information and includes all adjustments (consisting of
only normal recurring adjustments) necessary for a fair statement of the
financial information for the period presented. Net income (loss) per
share – basic and diluted, for the four quarters of each fiscal year may not sum
to the total for the fiscal year because of the different number of shares
outstanding during each period.
|
Quarter
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Year
Ended December 31, 2009
|
||||||||||||||||
|
Total
revenue
|
$ | 30,366 | $ | 32,485 | $ | 42,314 | $ | 69,524 | ||||||||
|
Gross
profit
|
$ | 16,822 | $ | 18,498 | $ | 20,816 | $ | 19,302 | ||||||||
|
Net
loss
|
$ | (3,917 | ) | $ | (2,156 | ) | $ | (3,853 | ) | $ | (37,236 | ) | ||||
|
Net
loss per share - basic
|
$ | (0.18 | ) | $ | (0.10 | ) | $ | (0.17 | ) | $ | (1.43 | ) | ||||
|
Net
loss per share - diluted
|
$ | (0.18 | ) | $ | (0.10 | ) | $ | (0.17 | ) | $ | (1.43 | ) | ||||
|
Shares
used in calculation - basic
|
21,838 | 21,961 | 22,247 | 26,124 | ||||||||||||
|
Shares
used in calculation - diluted
|
21,838 | 21,961 | 22,247 | 26,124 | ||||||||||||
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
Total
revenue
|
$ | 34,180 | $ | 36,543 | $ | 38,311 | $ | 30,893 | ||||||||
|
Gross
profit
|
$ | 18,797 | $ | 20,561 | $ | 21,509 | $ | 17,444 | ||||||||
|
Net
income (loss)
|
$ | 1,127 | $ | 2,332 | $ | 1,256 | $ | (1,138 | ) | |||||||
|
Net
income (loss) per share - basic
|
$ | 0.05 | $ | 0.11 | $ | 0.06 | $ | (0.05 | ) | |||||||
|
Net
income (loss) per share - diluted
|
$ | 0.05 | $ | 0.10 | $ | 0.06 | $ | (0.05 | ) | |||||||
|
Shares
used in calculation - basic
|
21,239 | 21,390 | 21,630 | 21,703 | ||||||||||||
|
Shares
used in calculation - diluted
|
22,064 | 22,529 | 22,760 | 21,703 | ||||||||||||
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
Not
Applicable.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of December 31, 2009. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934, as amended, is (i) recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms, and (ii) accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures as of
December 31, 2009.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible
to design into the process safeguards to reduce, though not eliminate, this
risk.
Our
management assessed the effectiveness of the company’s internal control over
financial reporting as of December 31, 2009. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated
Framework. Based on this assessment using those criteria,
management concluded that, as of December 31, 2009, our internal control
over financial reporting was effective.
The
effectiveness of the company’s internal control over financial reporting as of
December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.
Changes
in Internal Control Over Financial Reporting
There were no
changes in our internal control over financial reporting that occurred during
the fourth fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
|
OTHER
INFORMATION.
|
Not Applicable.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
Information
relating to our executive directors, executive officers and corporate governance
required to be provided in response to this item will be presented in our
definitive proxy statement in connection with our 2010 Annual Meeting of
Stockholders to be held on or about May 7, 2010, which information is
incorporated into this report by reference. However, certain information
required by this item concerning executive officers is set forth in Item 1
of Part I of this Report under the caption “Executive Officers of the
Registrant.”
We have
adopted a Code of Conduct and Ethics that applies to our principal executive
officer, principal financial officer and all other employees of NetLogic
Microsystems, Inc. This Code of Conduct and Ethics is posted in the corporate
governance section on our website at www.netlogicmicro.com. We intend to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Code of Conduct and Ethics by
posting such information in the corporate governance section on our
website at www.netlogicmicro.com.
|
EXECUTIVE
COMPENSATION.
|
Information
relating to executive compensation required to be provided in response to this
item will be presented in our definitive proxy statement for our 2010 Annual
Meeting of Stockholders to be held on or about May 7, 2010, which
information is incorporated into this report by reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER
MATTERS.
|
Information
relating to security ownership and securities authorized for issuance under
equity compensation plans will be presented in our definitive proxy statement
for our 2010 Annual Meeting of Stockholders to be held on or about May 7,
2010, which information also is incorporated into this report by
reference.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
|
Information
required to be provided in response to this item will be presented in our
definitive proxy statement for our 2010 Annual Meeting of Stockholders to be
held on or about May 7, 2010, which information is incorporated into this
report by reference.
|
PRINCIPAL
ACCOUNTING FEES AND
SERVICES.
|
Information
required to be provided in response to this item will be presented in our
definitive proxy statement for our 2010 Annual Meeting of Stockholders to be
held on or about May 7, 2010, which information is incorporated into this
report by reference.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES.
|
|
(a)
|
The
following documents are filed as part of this report on
Form 10-K:
|
|
(1)
|
Financial Statements.
Reference is made to the Index to the registrant’s the Financial
Statements under Item 8 in Part II of this Form
10-K.
|
|
(2)
|
Financial Statement
Schedules. The following consolidated financial statement schedule
of the registrant is filed as part of this report on Form 10-K and
should be read in conjunction with the Financial Statements of NetLogic
Microsystems, Inc.:
|
Schedule II—Valuation
and Qualifying Accounts for the years ended December 31, 2009, 2008 and
2007.
Schedules not
listed above are omitted because they are not required, they are not applicable
or the information is already included in the consolidated financial statements
or notes thereto.
|
(3)
|
Exhibits. The exhibits
listed on the accompanying index to exhibits in Item 15(b) below are
filed as part of, or hereby incorporated by reference into, this report on
Form 10-K.
|
|
(b)
|
Exhibits.
|
The exhibits
listed below are required by Item 601 of Regulation S-K.
|
Exhibit
|
|
Description
|
|
2.1
|
Not
in use.
|
|
| 2.2 | Not in use. | |
| 2.3 | Not ins use. | |
| 2.4 |
Asset
Purchase Agreement, dated as of April 30, 2009, between NetLogic
Microsystems, Inc. and Integrated Device Technology, Inc., which includes
the forms of Intellectual Property Cross License Agreement (Exhibit D) and
Non-Competition Agreement (Exhibit E) (1)
|
|
|
2.5
|
Agreement
and Plan of Merger Reorganization by and among NetLogic Microsystems,
Inc., Roadster Merger Corporation, RMI Corporation and the Representative
of Certain of the Holders of all of the Capital Stock of RMI Corporation
dated as of May 31, 2009 (2)
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of the registrant filed on August 2, 2004
(3)
|
|
3.4
|
|
Bylaws
of the registrant (4)
|
|
4.1
|
|
Specimen
common stock certificate (5)
|
|
4.2
|
|
Rights
Agreement by and between the registrant and Wells Fargo Bank, National
Association, dated July 7, 2004 (6)
|
|
4.3
|
|
Form
of Stock Option Agreement (7)
|
|
4.4*
|
Form
of Restricted Stock Unit Agreement (8)
|
|
|
10.1*
|
|
2000
Stock Plan and forms of related agreements (9)
|
|
10.2*
|
|
2004
Equity Incentive Plan (5)
|
|
10.2.1*
|
|
Form
of Stock Option Agreement under 2004 Equity Incentive Plan
(10)
|
|
10.2.2*
|
|
Form
of Restricted Stock Agreement under 2004 Equity Incentive Plan
(11)
|
|
10.3*
|
|
2004
Employee Stock Purchase Plan and forms of related agreements
(12)
|
|
10.4
|
|
Form
of Indemnity Agreement (9)
|
|
10.5
|
|
Not
in use.
|
|
10.9*
|
|
Form
of Change-In-Control Agreement between the registrant and each of certain
officers thereof (13)
|
|
10.10*
|
|
Incentive
Bonus Plan effective May 5, 2005 (14)
|
|
10.11
|
|
Form
of Master Purchase Agreement by and between the registrant and Cisco
Systems, Inc. (15)†
|
|
10.12
|
|
Not
in use.
|
|
10.13
|
|
Not
in use.
|
|
10.14
|
|
Standard
Form Lease by and between the registrant and Mission West Properties, L.P.
dated May 3, 2004 (16)
|
|
10.15
|
|
Second
Amendment to Lease between Mission West Charleston, LLC and NetLogic
Microsystems, Inc. (17)
|
|
10.16*
|
|
Employment
offer letter, dated April 12, 2000, between the registrant and Ronald
Jankov (17)
|
|
10.17*
|
|
Employment
offer letter, dated April 1, 1999, between the registrant and Roland
Cortes (17)
|
|
10.18*
|
|
Employment
offer letter, dated March 15, 2002, between the registrant and Ibrahim
Korgav, as amended (17)
|
|
10.19*
|
|
Employment
offer letter, dated February 9, 1996, between the registrant and
Varadarajan Srinivasan (17)
|
|
10.20*
|
|
Employment
offer letter, dated June 7, 1999, between the registrant and Marcia Zander
(17)
|
|
Exhibit
|
|
Description
|
|
10.21
|
|
Form
of Restricted Stock Unit Award Agreement (18)
|
|
10.22**
|
|
Employment
offer letter, dated June 30, 2009, between the registrant and Behrooz
Abdi.
|
|
10.23*
|
|
Employment
offer letter, dated July 11, 2007, between registrant and Michael Tate
(19)
|
| 10.24 | Not in use. | |
|
10.25
|
|
Purchase
Agreement between Registrant and Wintec Industries, Inc.†
(19)
|
| 10.26 | Not in use. | |
|
10.27*
|
|
NetLogic
Microsystems, Inc. 2008 New Employee Inducement Incentive Plan dated
January 16, 2008 (20)
|
|
10.28*
|
|
Form
of Restricted Stock Agreement for New Employee Inducement Grants
(19)
|
|
10.29*
|
|
Form
of Notice of Restricted Stock Unit Award and Agreement under the
registrant's 2008 New Employee Inducement Incentive Plan
(21)
|
|
10.30*
|
Form
of Notice of Restricted Stock Unit Award and Agreement under the
registrant's 2004 Equity Incentive Plan
(21)
|
|
|
10.31
|
Not
in use.
|
|
|
10.32
|
Purchase
Agreement dated December 18, 2009 between NetLogic Microsystems, Inc. and
Wells Capital Management (22)
|
|
|
10.32
|
Senior
Secured Credit Facilities Credit Agreement, dated as of June 19,
2009, among NetLogic Microsystems, Inc., NetLogic Microsystems
International Limited, the several lenders parties thereto and Silicon
Valley Bank. (23)
|
|
|
10.33
|
Form
of Revolving Note under the Senior Secured Credit Facilities Credit
Agreement. (23)
|
|
|
10.34
|
Form
of Tranche A Note under the Senior Secured Credit Facilities Credit
Agreement. (23)
|
|
|
10.35
|
Form
of Tranche B Note under the Senior Secured Credit Facilities Credit
Agreement. (23)
|
|
|
10.36
|
BVI
Guarantee and Collateral Agreement, dated as of July 17, 2009, by
NetLogic Microsystems, Inc., NetLogic Microsystems International Limited
and the other grantors referred to therein, in favor of Silicon Valley
Bank. (23)
|
|
|
10.37
|
Guarantee
and Collateral Agreement, dated as of July 17, 2009, by NetLogic
Microsystems, Inc. and the other grantors referred to therein, in favor of
Silicon Valley Bank. (23)
|
|
| 21.1** | List of Subsidiaries of Registrant | |
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm
|
|
31.1
|
|
Rule
13a-14 certification
|
|
31.2
|
|
Rule
13a-14 certification
|
|
32.1
|
|
Section
1350 certification
|
|
32.2
|
|
Section
1350 certification
|
|
(1)
|
Incorporated
by reference to Exhibit 2.4 to the registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 6,
2009.
|
|
(2)
|
Incorporated
by reference to Annex A to the definitive proxy statement filed by the
registrant with the Securities and Exchange Commission on September 30,
2009.
|
|
(3)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004,
filed with the Securities and Exchange Commission on August 20,
2004.
|
|
(4)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission
on October 21, 2008.
|
|
(5)
|
Incorporated
by reference to the same-numbered exhibit to Amendment No. 3 to Form
S-1 (Registration No. 333-114549) filed by the registrant with the
Securities and Exchange Commission on June 21,
2004.
|
|
(6)
|
Incorporated
by reference to Exhibit 99 (i) to Form 8-A (Registration No.
000-50838) filed by the registrant with the Securities and Exchange
Commission on July 8,
2004.
|
|
(7)
|
Incorporated
by reference to Exhibit 4.3 to Form S-8 (Registration No. 333-162765)
filed by the registrant with the Securities and Exchange Commission on
October 30, 2009.
|
|
(8)
|
Incorporated
by reference to Exhibit 4.4 to Form S-8 (Registration No. 333-162765)
filed by the registrant with the Securities and Exchange Commission on
October 30, 2009.
|
|
(9)
|
Incorporated
by reference to the same-numbered exhibit to Form S-1 (Registration
No. 333-114549) filed by the registrant with the Securities and
Exchange Commission on April 16,
2004.
|
|
(10)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2004,
filed with the Securities and Exchange Commission on November 12,
2004.
|
|
(11)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2005, filed with
the Securities and Exchange Commission on February 28,
2006.
|
|
(12)
|
Incorporated
by reference to the same-numbered exhibit to Form S-8 (Registration
No. 333-117619) filed by the registrant with the Securities and
Exchange Commission on July 23,
2004.
|
|
(13)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2004, filed with
the Securities and Exchange Commission on March 11,
2005.
|
|
(14)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2005,
filed with the Securities and Exchange Commission on May 9,
2005.
|
|
(15)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2005, filed with the Securities and Exchange Commission on
November 8, 2005.
|
|
(16)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 2006,
filed with the Securities and Exchange Commission on May 9,
2006.
|
|
(17)
|
Incorporated
by reference to the same-numbered exhibit to Amendment No. 1 to Form S-1
(Registration No. 333-114549) filed by the registrant with the Securities
and Exchange Commission on May 19,
2004.
|
|
(18)
|
Incorporated
by reference to Exhibit 10.25 to Form S-8 (Registration
No. 333-147064) filed by the registrant with the Securities and
Exchange Commission on October 31,
2007.
|
|
(19)
|
Incorporated
by reference to same-numbered exhibit to the registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007 filed with the
Securities and Exchange Commission on August 7,
2007.
|
|
(20)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2007, filed with
the Securities and Exchange Commission on March 14,
2008.
|
|
(21)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2008, filed with
the Securities and Exchange Commission on March 4,
2009.
|
|
(22)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on December 22,
2009.
|
|
(23)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009 filed
with the Securities and Exchange Commission on August 5,
2009.
|
|
*
|
Indicates
management contract or compensatory plan or
arrangement.
|
|
|
**
|
Filed
herewith.
|
|
|
†
|
Certain
portions of this exhibit are subject to confidential
treatment.
|
|
|
(c)
|
Financial
statements and schedules.
|
Reference is
made to Item 15(a) above.
Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Dated:
February 25, 2010
|
NETLOGIC MICROSYSTEMS, INC.
|
|||
|
By
|
/s/ RONALD
JANKOV
|
|||
|
Ronald
Jankov
President
and Chief Executive Officer
|
||||
POWER
OF ATTORNEY
KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Ronald Jankov and Michael Tate as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and
to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
|
Title
|
Date
|
|
| /s/ RONALD JANKOV |
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
February
25, 2010
|
||
|
Ronald
Jankov
|
|
|||
| /s/ MICHAEL TATE |
Vice President
and Chief Financial Officer (Principal Financial
Officer
and Principal Accounting Officer)
|
February
25, 2010
|
||
|
Michael
Tate
|
|
|||
| /s/ LEONARD PERHAM |
Director
|
February
25, 2010
|
||
|
Leonard
Perham
|
|
|||
| /s/ NORMAN GODINHO |
Director
|
February
25, 2010
|
||
|
Norman
Godinho
|
|
|||
| /s/ ALAN KROCK |
Director
|
February
25, 2010
|
||
|
Alan
Krock
|
|
|||
| /s/ DOUGLAS BROYLES |
Director
|
February
25, 2010
|
||
|
Douglas
Broyles
|
|
|||
| /s/ STEVE DOMENIK |
Director
|
February
25, 2010
|
||
|
Steve
Domenik
|
|
|||
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
(in
thousands)
|
Balance
at
Beginning
of
Period
|
Additions
|
Write-off/
Adjustments
|
Balance
at
End
of
Period
|
|||||||||||||
|
Allowance
for Doubtful Accounts and Customer Returns:
|
||||||||||||||||
|
Year
ended December 31, 2009
|
$ | 68 | $ | 4 | $ | 187 | $ | 259 | ||||||||
|
Year
ended December 31, 2008
|
$ | 19 | $ | 68 | $ | (19 | ) | $ | 68 | |||||||
|
Year
ended December 31, 2007
|
$ | 44 | $ | 18 | $ | (43 | ) | $ | 19 | |||||||
|
Income
Tax Valuation Allowance:
|
||||||||||||||||
|
Year
ended December 31, 2009
|
$ | - | $ | 7,043 | $ | - | $ | 7,043 | ||||||||
|
Year
ended December 31, 2008
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Year
ended December 31, 2007
|
$ | 34,526 | $ | - | $ | (34,526 | ) | $ | - | |||||||
EXHIBIT
INDEX
|
Exhibit
|
|
Description
|
|
2.1
|
Not
in use.
|
|
| 2.2 | Not in use. | |
| 2.3 | Not ins use. | |
| 2.4 |
Asset
Purchase Agreement, dated as of April 30, 2009, between NetLogic
Microsystems, Inc. and Integrated Device Technology, Inc., which includes
the forms of Intellectual Property Cross License Agreement (Exhibit D) and
Non-Competition Agreement (Exhibit E) (1)
|
|
|
2.5
|
Agreement
and Plan of Merger Reorganization by and among NetLogic Microsystems,
Inc., Roadster Merger Corporation, RMI Corporation and the Representative
of Certain of the Holders of all of the Capital Stock of RMI Corporation
dated as of May 31, 2009 (2)
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of the registrant filed on August 2, 2004
(3)
|
|
3.4
|
|
Bylaws
of the registrant (4)
|
|
4.1
|
|
Specimen
common stock certificate (5)
|
|
4.2
|
|
Rights
Agreement by and between the registrant and Wells Fargo Bank, National
Association, dated July 7, 2004 (6)
|
|
4.3
|
|
Form
of Stock Option Agreement (7)
|
|
4.4*
|
Form
of Restricted Stock Unit Agreement (8)
|
|
|
10.1*
|
|
2000
Stock Plan and forms of related agreements (9)
|
|
10.2*
|
|
2004
Equity Incentive Plan (5)
|
|
10.2.1*
|
|
Form
of Stock Option Agreement under 2004 Equity Incentive Plan
(10)
|
|
10.2.2*
|
|
Form
of Restricted Stock Agreement under 2004 Equity Incentive Plan
(11)
|
|
10.3*
|
|
2004
Employee Stock Purchase Plan and forms of related agreements
(12)
|
|
10.4
|
|
Form
of Indemnity Agreement (9)
|
|
10.5
|
|
Not
in use.
|
|
10.9*
|
|
Form
of Change-In-Control Agreement between the registrant and each of certain
officers thereof (13)
|
|
10.10*
|
|
Incentive
Bonus Plan effective May 5, 2005 (14)
|
|
10.11
|
|
Form
of Master Purchase Agreement by and between the registrant and Cisco
Systems, Inc. (15)†
|
|
10.12
|
|
Not
in use.
|
|
10.13
|
|
Not
in use.
|
|
10.14
|
|
Standard
Form Lease by and between the registrant and Mission West Properties, L.P.
dated May 3, 2004 (16)
|
|
10.15
|
|
Second
Amendment to Lease between Mission West Charleston, LLC and NetLogic
Microsystems, Inc. (17)
|
|
10.16*
|
|
Employment
offer letter, dated April 12, 2000, between the registrant and Ronald
Jankov (17)
|
|
10.17*
|
|
Employment
offer letter, dated April 1, 1999, between the registrant and Roland
Cortes (17)
|
|
10.18*
|
|
Employment
offer letter, dated March 15, 2002, between the registrant and Ibrahim
Korgav, as amended (17)
|
|
10.19*
|
|
Employment
offer letter, dated February 9, 1996, between the registrant and
Varadarajan Srinivasan (17)
|
|
10.20*
|
|
Employment
offer letter, dated June 7, 1999, between the registrant and Marcia Zander
(17)
|
|
Exhibit
|
|
Description
|
|
10.21
|
|
Form
of Restricted Stock Unit Award Agreement (18)
|
|
10.22**
|
|
Employment
offer letter, dated June 30, 2009, between the registrant and Behrooz
Abdi.
|
|
10.23*
|
|
Employment
offer letter, dated July 11, 2007, between registrant and Michael Tate
(19)
|
| 10.24 | Not in use. | |
|
10.25
|
|
Purchase
Agreement between Registrant and Wintec Industries, Inc.†
(19)
|
| 10.26 | Not in use. | |
|
10.27*
|
|
NetLogic
Microsystems, Inc. 2008 New Employee Inducement Incentive Plan dated
January 16, 2008 (20)
|
|
10.28*
|
|
Form
of Restricted Stock Agreement for New Employee Inducement Grants
(19)
|
|
10.29*
|
|
Form
of Notice of Restricted Stock Unit Award and Agreement under the
registrant's 2008 New Employee Inducement Incentive Plan
(21)
|
|
10.30*
|
Form
of Notice of Restricted Stock Unit Award and Agreement under the
registrant's 2004 Equity Incentive Plan
(21)
|
|
|
10.31
|
Not
in use.
|
|
|
10.32
|
Purchase
Agreement dated December 18, 2009 between NetLogic Microsystems, Inc. and
Wells Capital Management (22)
|
|
|
10.32
|
Senior
Secured Credit Facilities Credit Agreement, dated as of June 19,
2009, among NetLogic Microsystems, Inc., NetLogic Microsystems
International Limited, the several lenders parties thereto and Silicon
Valley Bank. (23)
|
|
|
10.33
|
Form
of Revolving Note under the Senior Secured Credit Facilities Credit
Agreement. (23)
|
|
|
10.34
|
Form
of Tranche A Note under the Senior Secured Credit Facilities Credit
Agreement. (23)
|
|
|
10.35
|
Form
of Tranche B Note under the Senior Secured Credit Facilities Credit
Agreement. (23)
|
|
|
10.36
|
BVI
Guarantee and Collateral Agreement, dated as of July 17, 2009, by
NetLogic Microsystems, Inc., NetLogic Microsystems International Limited
and the other grantors referred to therein, in favor of Silicon Valley
Bank. (23)
|
|
|
10.37
|
Guarantee
and Collateral Agreement, dated as of July 17, 2009, by NetLogic
Microsystems, Inc. and the other grantors referred to therein, in favor of
Silicon Valley Bank. (23)
|
|
| 21.1** | List of Subsidiaries of Registrant | |
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm
|
|
31.1
|
|
Rule
13a-14 certification
|
|
31.2
|
|
Rule
13a-14 certification
|
|
32.1
|
|
Section
1350 certification
|
|
32.2
|
|
Section
1350 certification
|
|
(1)
|
Incorporated
by reference to Exhibit 2.4 to the registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 6,
2009.
|
|
(2)
|
Incorporated
by reference to Annex A to the definitive proxy statement filed by the
registrant with the Securities and Exchange Commission on September 30,
2009.
|
|
(3)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004,
filed with the Securities and Exchange Commission on August 20,
2004.
|
|
(4)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission
on October 21, 2008.
|
|
(5)
|
Incorporated
by reference to the same-numbered exhibit to Amendment No. 3 to Form
S-1 (Registration No. 333-114549) filed by the registrant with the
Securities and Exchange Commission on June 21,
2004.
|
|
(6)
|
Incorporated
by reference to Exhibit 99 (i) to Form 8-A (Registration No.
000-50838) filed by the registrant with the Securities and Exchange
Commission on July 8,
2004.
|
|
(7)
|
Incorporated
by reference to Exhibit 4.3 to Form S-8 (Registration No. 333-162765)
filed by the registrant with the Securities and Exchange Commission on
October 30, 2009.
|
|
(8)
|
Incorporated
by reference to Exhibit 4.4 to Form S-8 (Registration No. 333-162765)
filed by the registrant with the Securities and Exchange Commission on
October 30, 2009.
|
|
(9)
|
Incorporated
by reference to the same-numbered exhibit to Form S-1 (Registration
No. 333-114549) filed by the registrant with the Securities and
Exchange Commission on April 16,
2004.
|
|
(10)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2004,
filed with the Securities and Exchange Commission on November 12,
2004.
|
|
(11)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2005, filed with
the Securities and Exchange Commission on February 28,
2006.
|
|
(12)
|
Incorporated
by reference to the same-numbered exhibit to Form S-8 (Registration
No. 333-117619) filed by the registrant with the Securities and
Exchange Commission on July 23,
2004.
|
|
(13)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2004, filed with
the Securities and Exchange Commission on March 11,
2005.
|
|
(14)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2005,
filed with the Securities and Exchange Commission on May 9,
2005.
|
|
(15)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2005, filed with the Securities and Exchange Commission on
November 8, 2005.
|
|
(16)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 2006,
filed with the Securities and Exchange Commission on May 9,
2006.
|
|
(17)
|
Incorporated
by reference to the same-numbered exhibit to Amendment No. 1 to Form S-1
(Registration No. 333-114549) filed by the registrant with the Securities
and Exchange Commission on May 19,
2004.
|
|
(18)
|
Incorporated
by reference to Exhibit 10.25 to Form S-8 (Registration
No. 333-147064) filed by the registrant with the Securities and
Exchange Commission on October 31,
2007.
|
|
(19)
|
Incorporated
by reference to same-numbered exhibit to the registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007 filed with the
Securities and Exchange Commission on August 7,
2007.
|
|
(20)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2007, filed with
the Securities and Exchange Commission on March 14,
2008.
|
|
(21)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2008, filed with
the Securities and Exchange Commission on March 4,
2009.
|
|
(22)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on December 22,
2009.
|
|
(23)
|
Incorporated
by reference to the same-numbered exhibit to the registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009 filed
with the Securities and Exchange Commission on August 5,
2009.
|
|
*
|
Indicates
management contract or compensatory plan or
arrangement.
|
|
|
**
|
Filed
herewith.
|
|
|
†
|
Certain
portions of this exhibit are subject to confidential
treatment.
|
|
|
(c)
|
Financial
statements and schedules.
|
Reference is
made to Item 15(a) above.